In this issue:

• New website
• 2012 Fund Results
• Japanese End Game
• Performance Fees
• Shaken not Stirred

We're back after the Christmas & New Year break - greatly and gratefully refreshed, and relishing the challenges and opportunities of 2013. The break wasn't all sun, sand and swimming though. Those of you who have visited our new website over the past few weeks will have noticed significant changes, including a new look and feel with additional content and free access to the Fund Selector, Fund Profiles News and the Library. Feedback from users has been positive, but further suggestions or comments are always welcome.

Looking back, 2012 was dominated by macro risks combined with politics and politicians - never a good mix. However the immediate threats to Europe were resolved by the "whatever it takes" approach, the US stepped back from the fiscal cliff and there does seem to be a recovery of sorts underway, and China appears to have avoided the hard landing scenario many were fearing.

Australia's equity gained 14.6% in 2012, and 20.2% on an accumulation basis with most of the gains coming in the final six months of the year as global risks subsided and interest rates fell to historical lows, leading to a search for yield which resulted in the big four banks and Telstra gain 30 to 40%, while the materials sector struggled. In this environment equity based hedge funds averaged gains of 12.18% with the best performing fund returning over 50% and the worst falling more than 40%. Manager and fund selection remains vital!

It seems unsurprising therefore that markets are experiencing a definite change to "risk on" based on feedback from a range of fund managers and investors. However that doesn't mean there aren't significant risks remaining, as some of the issues have just been deferred. Concerns remain in Australia that the price side of the P/E ratios have moved and there may be some delay in earnings. Another risk on the horizon seems to be the advent of the currency wars as the US, Europe and now Japan all compete to drive their currencies lower.

This article from macro manager Blue Sky Apeiron outlines their views on the possible outcomes and dangers that Japan's new policies are creating. Interesting and sobering, and if their suspected scenario comes to pass Australia will feel the effects given Japan's position of our second largest trading partner.

Elsewhere one of the major challenges the absolute return sector faces is the necessity to provide value in return for the fees charged. Downward pressure on fees continue, but this article in AFM's "Understanding Hedge Funds" series argues that it is not merely the size of the fees but the way they're structured that will come under scrutiny. We remain firmly of the view that paying high fees for the best managers is a sound investment, and paying fees for poor performance should lead to a change of manager.

And now for something completely different. Personally I have never enjoyed drinking exotic cocktails, but seeing the skills involved in making them might be a different matter - even in Russia.

Have a good week-end.

Regards,

Chris.