Last week we suggested that given the outlook for the local currency, Australian investors would be well served by including some offshore exposure to their portfolios as protection against further falls in the A$. With various economists now calling the Aussie down to US$0.80 this may well be the way to go.  Certainly there seems to be an exodus of offshore investors from the equity market (where they constitute 47% total value) after the inflows of the past 12 months, which has further undermined the currency and the market.

In any event, local funds which invest offshore benefitted significantly (provided they weren't hedged) from the A$'s fall of over 7% in May, with strong double digit returns from the likes of PM Capital and Magellan amongst others.  On the local front returns have been varied as usual depending on the manager, fund or strategy.  Some of this week's reported highlights are featured below.

Last Monday we wrote an article for Alan Kohler's Eureka Report entitled "In defence of Hedge Funds" to counter some negative comments on the sector in Ian Verrender's article "The thin edge of the hedge wedge". Ian suggested that after fees investors might find it simpler and cheaper to merely purchase an index fund - in other words, just buy the market.

The thrust of our response was that given the diverse range of underlying assets and strategies which combine to make up the "hedge fund" sector, averages can be both dangerous and misleading, as can results of average returns.

But it did cause us to delve into the returns (after fees) of all funds in our database with a five year track record, and compare them against the market (using the ASX200 accumulation index as the benchmark).  For the record, over the five years to the end of May, the market provided investors with an annualised return of 3.07%. Therefore, in one way Ian was correct: 37% of the 145 funds underperformed the market, and 15% underperformed to the extent they provided negative returns.

On the positive side, 63% of funds outperformed the market, and therefore presumably justified their existence up to a point. However given that the markets return of 3.07% is not what we would call acceptable, particularly given the risk and volatility concerned, that might not be saying much.

But 41% of all funds doubled the market's return, and 27 (or 18%) provided their investors with annualised five year returns ranging between 10 and 19%, which by any standard is impressive. The chart showing the spread of returns is below:

It does however emphasise that analysis and understanding of the strategy, manager and fund is essential when discussing hedge funds - as it is when investing in them.

Performance and News Updates on www.fundmonitors.com this week:

BlackRock Global Allocation Fund returned 2.04% in April, in line with its benchmark, and 14.10% over the preceding 12 months. The team continues to believe that equity valuations remain attractive relative to fixed income valuations, though the Manager has become incrementally more cautious over the short-term given increasing stock prices, weaker revenue expectations and uncertainty in Europe.

The Bennelong Long Short Equity Fund had a remarkable May delivering 9.49%, bringing its twelve month performance to 19.89%. The portfolio benefitted from a pleasing month, with both the long and short portfolios contributing positively.

Bennelong Kardinia Absolute Return Fund delivered 0.4% during May.  The twelve month return now stands at 18.46%.  The Fund's net equity market exposure, including derivatives was reduced to 31.3% (47.5% long and 16.2% short).

The K2 Asian Absolute Return Fund returned 2.38% during April to bring twelve month performance to 33.82%.  The Fund's net exposure band has been maintained at 80-100%, ending the month at 96%, marginally lower than April. Increasing volatility in recent weeks, together with seasonal weakness justified a wider trading band of the Fund's net exposure.

And finally, for something completely different, The Swear Jar, probably something every office needs.  Ours certainly does!!

On that note, I hope you have a happy and healthy weekend, or in Australia, a long weekend (all except Western Australia who will be celebrating the Queens birthday in September).

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

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BENNELONG LONG SHORT EQUITY FUND

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

We would like to highlight the following aspects of the Fund:

• 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% .
• Portfolio Manager Richard Fish has over 25 years market experience, while Bennelong Funds Management, who have over $3 billion in FUM across various funds, provide infrastructure, operational and compliance functions.
• The Fund's Investment history commenced in January 2002 and has 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.
• 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 FILESFund Review: Bennelong Long Short Equity Fund (pdf format)

ONE BIG PROBLEM FOR THE HEDGE FUND SECTOR:

THEY'RE AN EASY TARGET

It seems most people's opinions on hedge funds generally fall into one of two categories: Firstly there are those who claim to understand them, and frequently criticise them in the process, and secondly there are those who admit they don't understand them. The problem is those in the second category tend to listen or believe the opinions of those in the first.

And the problem for the hedge fund industry is that as a whole it's an easy target, as the funds that make up the sector is extraordinarily broad and diverse. As a result finding hedge funds or hedge fund managers who fit the negative stereotype is not difficult, in part because they're the ones who get most of the publicity.

I have to admit to potentially being a little biased in the good vs. bad hedge fund debate, and even if I'm not most readers will assume that I am anyway. However it is worth pointing out some facts about the hedge fund sector, while at the same time accepting the reality that not all of them are perfect, and only a minority are truly "best of breed".

So firstly let's look at what makes up the universe. ASIC in its Regulatory Guide 240, is quite clear and correct when it states that there's no firm definition of a hedge fund, but provides a range of features which it uses to identify them. These include a more complex investment strategy that aims to generate returns with a low correlation to equity and bond indices, the use of derivatives such as futures and options, the use of leverage or borrowing, the use of short selling, and finally the charging of a performance based fee in addition to a management fee.

Using the above five criteria when evaluating the performance of hedge funds creates a wide range of funds to choose from, each of which might invest in completely different asset types such as equities, bonds, credit, commodities or currencies which would normally not be associated with each other, and therefore rarely compared.

Adding to the complexity for the casual observer is that there are over twenty different strategies that a fund manager might use. And within each strategy there are further sub strategies or styles to complicate the analysis further. For instance if we just take those funds investing in equities, the www.fundmonitors.com database divides the universe up into eight further sub strategies or styles.

To make matters worse it doesn't end there. Even taking equity long/short, (the most popular equity type strategy) there are funds which specialise in specific market sectors, such are large cap/small cap or industrials vs. resources. Some go further and focus on small cap and emerging resource or gold stocks.

Styles differ also - quantitative and discretionary, as does the geographic universe or mandate which might cover Australia, Asia, Asia ex Japan, Europe or the US - and so it goes on.

The point of detailing all this is that the term "hedge fund" casts a very wide net indeed, and frequently there is little to no comparison or correlation between one end of the spectrum and the other.

The same can be said of performance, and indeed it is worth noting that one of the objectives of hedge or alternative funds for institutional investors is to diversify their exposure to a specific asset class so that when one (such as equities) performs badly others (such as bonds or commodities) provide some protection against the volatility.

Read the entire article by Chris Gosselin here.

ATTACHED FILESOne big problem for the hedge fund sector (pdf format)

Sell in May and go away? That all depends where you're going.

With just one trading day to go, May has been an interesting month. The sharp contrast between the fall in the ASX200 of -4.33%, and the S&P500's gain of 4.08% is a significant differential of 8.41%.

Although the overall fall on the ASX200 has been significant (although smaller than May 2012 when it fell over 7%) the variance between sectors will also make a big difference to this month's fund and strategy performances.

The contrast will be even more glaring when comparing returns between funds investing in Australia, and those with offshore or global mandates.  Partly or un-hedged international funds will benefit from the decline in the A$ of 6.7% during May from US$1.036 to US$0.967 which pushes the return on the S&P500 in $A terms to 11.15%. This brings the potential difference in returns between local and un-hedged US equities to 15.48%.

This raises two points of interest. Firstly the volatility of monthly returns recorded by the ASX over the past 12 months, with moves ranging between +5.37% and -4.43%. 

Secondly and looking forward, is the outlook of the ASX and the A$ given the deterioration in sentiment.  Most Australian  investors, both individual and institutional, have a strong bias to domestic  rather than global equities which has worked well until 2008.

However with local interest rates forecast to fall further, the A$ is expected to have further to fall, and the earnings outlook for the domestic market is deteriorating on the back of contraction in the mining sector. Meanwhile the medium outlook for consumer related companies has deteriorated, even if the yield argument may keep the (expensive) banks, Telco's and REITS supported.

While offshore markets in each geography have their own problems they may be further into a recovery at a time that Australia is moving into a slower growth situation. In this environment, investors may need to consider their asset and strategy allocation as the long only and index funds which have performed so well over the past year make way for more risk averse investments, or include the option of funds with offshore exposure.

Performance and News Updates on www.fundmonitors.com this week:

The BlackRock Multi Opportunity Fund had a sound April, returning 1.69% and 10.86% over the last 12 months.  Their latest Fund Review is available here.

SGH Ice Fund, a small cap manager, delivered 2.57% during April and 28.53% over the preceding 12 months. 

Mathews Capital Velocity Fund redemptions have been frozen for 12 months. Perpetual Trust Services, the responsible entity of the Velocity Fund has advised investors that the fund has become "non- liquid" and that redemptions will be suspended for up to nine months.

And finally, for something completely different, a funny look at insurance company decision making policy.

On that note, I hope you have a happy and healthy weekend!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook