Hedge Funds show their mettle

Every cloud has a silver lining, or so they say, so the volatility in Australia's equity market in the last couple of weeks, and which saw the ASX 200 drop 1.7% in April following a negative (albeit small) fall of 0.06% in March has probably played into the hands of hedge fund managers. Local equity-based hedge funds have gained around 1.2% over the past two months, and have now outperformed the index by 2.5% percent over a rolling 12 month period.

Globally it is no different. Industry newsletter Hedgeweek reported this week that hedge fund managers may be showing their mettle as global financial and geopolitical volatility continues, with the hedge fund industry beginning to beat popular indexes, according to eVestment's just-released April 2015 Hedge Fund Performance Report.

There has been a very long and very active debate over the value of hedge funds, but the popular opinion of hedge funds as being highly risky is simply not borne out by the facts. In a strongly rising market the protection taken by hedge fund managers on the short side frequently sees them underperforming, but when volatility increases and markets fall, their short positions come into their own.

This is not always the case, and there are someexceptions to the rule with a handful of fund managers behaving or performing according to the myth. Thankfully there are others, and many more of them, who outperformed the market in both positive and negative markets. By definition this is difficult to do as they have to actively short stocks or the market to drive performance, rather than just to reduce risk. Part of the skill when selecting the best manager to suit the end investor's objective therefore is to analyse both their up and down capture ratios.

Talking of risk, it seems that twenty years after bringing down major British bank Barings (which listed amongst its historical credits funding the Napoleonic wars), the SMH reports that rogue trader Nick Leeson is sounding alarm bells about China. Unless the country reforms its stock markets, he warns, it's only a matter of time until his earlier disaster repeats itself on a larger scale. So it  is not only rogue traders that create risk, but underlying government controls or lack thereof. The level of speculative trading in China driven by retail investors (or should that be punters?) funded by margin trading is, unless they are very, very careful, going to lead to inevitable volatility, and a repeat of the damage witnessed in 2008.

Finally Hedge Clippings can't resist mentioning something about this week's budget. It was certainly better than last year's, but we can't help feeling that it's really all about job protection - those of Treasurer Joe Hockey, and the Prime Minister, Tony Abbott. The real issue we see with the budget, was its lack of commitment to tackle major issues for the future. For example, consider the estimate that in 10 year's time the tax concessions on superannuation will cost the nation double that of the age pension - which the superannuation system was orginally designed to reduce.

Specific results received this week include the following LATEST PERFORMANCE UPDATES:

Optimal Australia Absolute Trust Fund reported a net positive return in April of 1.96%, compared to the ASX200 Accumulation Index of -1.70%

The Bennelong Kardinia Absolute Return Fund fell 0.59% in April to bring the Fund's annual performance since inception to 13.08% compared to the ASX200 Accumulation benchmark's 5.61%.

Monash Absolute Investment Fund had a flat April (0.0%), while the Australian equity market had its second consecutive negative month (-1.70%).

Chris

CEO

AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter

We might apologize for being boring, but the budget shouldn't be!

Each Friday the Hedge Clippings team cast their collective minds over the economic activity of the previous seven days, taking note when we can of happenings relevant to the absolute return and hedge fund sector. Uppermost in our thinking is trying to remain relevant and informative while trying not to bore the socks off our readers, not to mention ourselves, at the same time.

You might think we shouldn't be so indulgent as to worry about whether we're the ones bored or not, but it does concern us. Given that there's been an unrelenting theme of QE, central bank intervention, and low and falling interest rates across financial markets for so long now, it's been difficult to avoid being boring, as we're sure you might have noticed.

The net result of the these conditions has been, as we've mentioned before, the rise of the TINA, or There Is No Alternative, investment strategy that has seen equity market valuations pushed and stretched to dangerous levels as noted this week by no less than US Fed head honcho, Janet Yellen.

It is ironic therefore that at a time when the RBA reduced rates by a further 25 bps to an unheralded 2%, 10 year bond yields both in Australia and overseas start to rise, and rise quite sharply, with the result that equity markets, and particularly the high yielding banks, retreated sharply.

For the record the ASX 200 Accumulation Index fell 1.7% in April (compared with early indications of equity-based hedge funds rising 0.52%) and has fallen a further 2.5% since, including the largest one-day fall for a couple of years.

Whether this was the start of a much anticipated pullback, or just a pause remains to be seen, but it was certainly an indication of what could, or should happen in response to rising bond yields.

And while on the subject of boring, PM Tony Abbott has promised Australia a boring budget next week. For his part it might be wishful thinking, hoping perhaps that the electoral response to Joe Hockey's second budget will be boring, unlike last year's. Unfortunately a boring budget is not what is required, and it is gratifying to see that there is an increasingly widespread opinion that long-term vision and strong management, rather than pandering to interest groups and personal political survival, are what's required.

Specific results received this week include the following LATEST PERFORMANCE UPDATES:

Alpha Beta Asian Fund generated a return of -1.16% during March, to bring the Fund's annual return since inception to 6.77% p.a.

Signature Quantitative Fund 2.80% for March, to bring the annual performance since inception to 15.99%.

The KIS Asia Long Short Fund returned of2.59% during March, bringing the Fund's annual return since inception to 14.91% p.a

Supervised High Yield Fund rose 0.45% during March to bring the Fund's annual return since inception to 10.23%. In the same time frame the RBA Cash Rate returned 3.49%.

Chris
CEO,AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter

INSYNC GLOBAL TITANS FUND

ATTACHED FILESInsync Global Titans Fund AFM Fund Review March 2015 (pdf format)