BENNELONG LONG SHORT EQUITY FUND

Attached is our most recently updated Fund Review on the Bennelong Long Short Equity Fund.  

• The Fund is a research driven, market and sector neutral, "pairs" trading strategy investing primarily in large cap stocks from the ASX/S&P100 Index, with a ten year track record and annualised net returns of over 20% pa.
• Fund performance was satisfactory this month despite a major surprise profit warning and substantial correction by one of the long financial positions (QBE Insurance Group).  At the sector level, strong returns were made in Industrials and Health Care and Financials and Consumer Staples recorded negative returns.
• Since inception in January 2003 the Fund has had positive annual returns each year, including an 11.95% return in 2008 and 20.6% in 2011, both of which were negative years for the ASX200.
•  The Fund's risk statistics are also sound with maximum drawdown of 12.22% and 71% positive months. Both the Sharpe Ratio at 1.26 and the Sortino ratio at 2.20, indicate a high reward-to-risk ratio.
• The consistent returns across the investment history indicates the Fund's ability to provide positive returns in volatile and negative markets and significantly outperform the broader market.

Sean Webster

Research and Database Manager
Australian Fund Monitors

ATTACHED FILESBennelong Long Short Equity Fund (pdf format)

It is generally accepted that the bigger a fund becomes, the greater the inflows it receives. That might sound pretty obvious the other way around (in other words, the larger the inflows, the larger it becomes) but the reality was confirmed this week with figures produced by HFR in their Global Hedge Fund Industry Report.

Amongst the numbers showing the industry FUM as a whole now totals US$2.63 trillion, the concentration of inflows by fund size was significant according to  HFR numbers. For the full year to December 2013, investors allocated $40 billion to firms with greater than $5 billion, $16.6 billion to firms with between $1 billion and $5 billion in AUM, and $7.2 billion to firms with less than $1 billion in AUM.

Given the relatively fewer numbers of large funds with $5 billion or more under management, this left the high number of smaller firms, (although $1 billion is significant by Australian standards) fighting over the smallest piece of the pie. What is interesting is that the weighted average return of the HFR Index was only 9.2% for the year, a pretty underwhelming result given the S&P500 gained around 30%.

While not privy to all HFR's data, what is clear is that Australian managers, both large and small, generally performed well above their global peers in 2013, with an average return across all strategies of 15%, and with equity based funds returning over 20%. To be fair these averages were not weighted by FUM, but given the returns of two of the largest managers in AFM's database, Platinum and Magellan, both with over $15 billion, returning an average of 42%, the weighted result would be even higher.

Both Platinum and Magellan invest offshore, so would no doubt receive some benefit from the falling $A, but nonetheless both provided excellent returns.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Pengana Australian Equities Fund returned 1.27% during December with a month-end cash balance of 22%. Annual return was 18.60% (S&P/ASX 200 Accum 20.12%) with a volatility of 7.82% (Index 11.43%).

The Optimal Australia Absolute Trust returned 0.54% during December ending the month with a net exposure position of 11.1%.

Aurora Fortitude Absolute Return Fund returned 0.74% during December and 7.57% for the last 12 months with a volatility of 1.58% and only one month of negative returns. The Fund also recorded positive returns for the four months the equity market was negative over the last year.

The Totus Alpha Fund returned -0.39% during December and 60.19% for the year to December. Top contributors to performance over the month were long positions in Australian index futures +1.72%, Japanese index futures +1.6% and a short in Transfield Services +0.75% (mining services).

Intelligent Investor Value Fund returned 0.38% during December and 44.21% over the last twelve months with a set of very strong risk statistics, notably a Sharpe ratio of 3.36.

FUND REVIEWS RELEASED THIS WEEK:

The Bennelong Kardinia Absolute Return Fund is long biased, research driven, active equity long/short strategy investing in listed ASX companies with a seven year track record. The Fund returned 1.11% in December 2013, taking returns for the year to 14.78%, broadly in line with annualised returns since inception in May 2006 of 14.10%. By month-end the Manager had increased the Fund's net exposure to 74.8%, 82.5% long and 7.7% short.

FUTURE EVENTS

5 February 2014: HFA Sydney Institutional Investor Roundtable - Complimentary roundtable discussion with refresments provided. This is the second of the HFSB 2014 series of global institutional investor roundtables where investors and managers present practical case studies on topical issues.

The Hedge Fund Standards Board is a standard setting body for the global hedge fund industry, which brings together investors and managers from around the world to promote high standards of practice in the industry. It is custodian of the Hedge Fund Standards which: (a) provide a mechanism for promoting transparency, integrity and governance; (b) facilitate investor due diligence; (c) help safeguard the reputation of the industry; (d) complement public policy.

12 February 2014: Investment Administration Conference - Efficiency in a Regulated World. Doltone House, Hyde Park, Sydney.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different, Sam Kekovich, Lambassador for Australia encouraging us to throw a bit of lamb on the barbie this weekend.  For the benefit of our overseas recipients, Monday 27 January is an Australia wide public holiday and we will be taking advantage of a relaxing 3 day weekend.

On that note, I hope you have a happy and safe Australia Day long weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

Bernie Madoff, the fraudster who ripped $65 billion off investors over a 20 year period, and who in spite of not actually being a hedge fund did nothing to help the industry's reputation, reportedly has advanced kidney cancer, and recently suffered a heart attack. It seems he might not get to serve out his full 150 year sentence.

Meanwhile Shawn Richard, the only person jailed over the Trio Capital/Astarra fraud (which was a hedge fund) was reportedly released from goal this week after serving his minimum two and a half year sentence. At the same time financial adviser Ross Tarrant, who was banned by ASIC for seven years for recommending his clients invest in Richard's fraud (and presumably benefited from the significant commissions on offer) has lodged a submission with the Federal Court to appeal the AAT's upholding of his ASIC ban order.

Welcome back, with somewhat belated Happy New Year wishes. AFM and "Hedge Clippings" took the opportunity for a figurative re-charge of the batteries, which in my case consisted of the traditional over-indulgence, and resultant side effects, to the tune of about 5kgs on the scales. I tried to convince myself that the scales themselves might have their own battery problem, but sadly not. 

So back to the grindstone, armed with the same resolutions (as one of my children not so kindly noted) I made 12 months ago. The 5/2 diet, (it works for me anyway) more laps of the local pool, and lower the alcohol consumption.  There's even a plan to go the whole month of February without touching a drop, but as I have found in the past, even the best laid plans can go astray!

One task I did achieve over the break was to attack my overloaded email inbox, which regularly receives 150 to 200 or more messages a day, and needless to say I consistently fail to clear. I came across a program called SaneBox which promised to sort regularly read and important messages from the irregular, or unimportant ones. With some trepidation I tried it.

After advising me it might take some time to sort through the 156,783 emails I had or hadn't previously read and actioned, it completed the task in less than half an hour, and it would appear to date, very successfully.  Don't ask me how it works, but here's a link to more information.

Of course when it comes to assigning Hedge Clippings to "Important" or "Later", you will have to make your own decision!

Now getting back to reality, taking a look back at fund performances for December and 2013 as a whole, and a look forward to what might be in store in 2014.

Although only about half of December's results are to hand, returns are looking as if the industry finished the year on a sound note, up 1.5% for the month, and taking full year returns to 15.58%. Comparative performances for the ASX200 Accumulation Index were +0.79% and +20.12%, although equity based funds outperformed with returns of +1.70% and +21.24%  respectively. 

From a strategy perspective Equity 130/30 outshone all others, albeit with only a relatively small sample size, returning 37.56% in 2013, followed by Equity Long at 25.61% and Equity Long/Short at 20.44%, and Equity Income on 19.96%. At the other end of the scale Currency/FX funds lost 4.93% on average, and Commodity/CTA's 2.75% to round off a disappointing year. Full details are available here.

Individual fund performances ranged from +90% down to -55%, with just under 30% of funds outperforming the ASX200 Accumulation's +20.12% over the year, and 87% delivering positive returns.

One interesting statistic is that the ASX200, while enjoying a sound year, significantly underperformed other developed markets and in particular the S&P500 accumulation return of 32%. However, when reviewing overseas and global hedge fund returns and databases, it would appear that average fund returns in 2013 were less than 10%, significantly underperforming the market. One can speculate on the reason, but it might be the broader range of strategies employed overseas, particularly in the non-equity space of credit and bond funds, which suffered compared to their equity counterparts.

AFM's full analysis of the Australian Absolute Return and Hedge Fund sector will be available once all fund's December returns have been received later this month. If you like to receive a copy please send us an email.

Looking forward, the general view of managers we have spoken to is a more subdued return from markets than in 2013, but with higher volatility, which has been the recent trend based on December's market (down over 4% at one stage before recovering in the Christmas rally) and month to date in January. The A$ appears to have further downside potential, having fallen 16% since it highs last year, and Australia's economy is likely to see headwinds, while the US recovery gradually takes place.

Overseas, and globally, tapering will stay firmly on the agenda, but with Janet Yellen due to take the reins from Ben Bernanke at the end of this month, the questions will be at what pace, and to what degree will she change direction. Politicians and policy, here in Australia and overseas will no doubt continue to take centre stage and therefore the controls; China may or may not avoid a hard or soft landing; and the Middle East will sadly continue to hit turbulence.

Looking back 12 months to January 2013 nothing much seems to have changed except some of the names and faces of the players.  

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Bennelong Kardinia Absolute Return Fund returned 1.11% in December 2013, taking returns for the year to 14.78%, broadly in line with the Fund's annualised return since inception of 14.10%. The Fund's December performance was achieved in a market which although positive lagged most of its global developed market peers, and which at one stage was down over 4% on concerns over the US tapering of asset purchases. By month end the Manager had increased the Fund's net exposure to 74.8%, based on 82.5% long, and 7.7% short.

The Monash Absolute Investment Fund returned -0.60% during December 2013 bringing the 12 month return to 30.41% as compared to the S&P/ASX 200 Accum return of 20.12% with a lower volatility of 8.55% as compared to 11.43% for the Index. The Fund's month-end exposures were 83% net and gross 86%. The Manager discusses a number of portfolio holdings including Royal Mail, Greencross and Silver Chef.

Morphic Global Opportunities Fund returned 3.85% during December as the Fund benefited from $A weakness, holdings in US stocks as well as a short position on US bonds and other currencies. Full year performance was 42.49%, in line with the Fund's benchmark. The Fund closed the year fully invested, but with a significant overweight to developed markets, led by Japan, and a large underweight in emerging markets.

The Bennelong Long Short Equity Fund returned 2.68% during December bringing twelve month performance to 22.46%. The Fund now has 11 years of unbroken positive returns. Annualised performance since inception in January 2003 is 20.94% with the Fund's maximum drawdown 12.22%. Comparative ASX 200 Acc figures are 10.08% and 47.19%.

Insync Global Titans Fund returned 4.9% in December ahead of the MSCI All Country Index in $A at 4.0% with the Fund recording an up capture ratio of 0.45 and down capture ratio of -1.17 over the last 12 months.  The Fund's Sharpe ratio of 3.18 is notable as is the maximum drawdown on 2.54%, also over the last 12 months. The Fund has no foreign exchange hedging in place and benefitted from the 2.1% depreciation of the Australian dollar against the US dollar in December.

FUTURE EVENTS

5 February 2014: HFA Sydney Institutional Investor Roundtable - Complimentary roundtable discussion with refresments provided. This is the second of the HFSB 2014 series of global institutional investor roundtables where investors and managers present practical case studies on topical issues.

The Hedge Fund Standards Board is a standard setting body for the global hedge fund industry, which brings together investors and managers from around the world to promote high standards of practice in the industry. It is custodian of the Hedge Fund Standards which: (a) provide a mechanism for promoting transparency, integrity and governance; (b) facilitate investor due diligence; (c) help safeguard the reputation of the industry; (d) complement public policy.

12 February 2014: Investment Administration Conference - Efficiency in a Regulated World. Doltone House, Hyde Park, Sydney.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different, Clark the talking dog expresses his disappointment on missing out on some tasty treats.

On that note, I hope you have a happy and safe weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.