As equity markets around the globe continued to be buffeted in February, Australia’s Absolute Return and Hedge Fund industry slipped into the red, collectively losing 1.6% for the month, and erasing January’s gains to be down 1.21% for the year to date, based on 78% of local funds returns.

Against this the S&P 500 index in America lost 10.99% in February to bring year-to-date losses to minus 18.62%, while on the local front the ASX 200 lost 5.54% to show a cumulative decline in the first two months of 2009 of 10.15%.

When put in perspective, 48% of the over 200 funds listed in Australian Fund Monitors index of hedge funds have produced a positive return in the first two months of 2009, with 84% of all funds outperforming the ASX 200.

The results, whilst not universally positive, again showed that in times of adversity hedge funds, far from being the speculative vehicles that they are frequently portrayed as, provided diversity and significantly better risk profiles than equities alone.

For detailed analysis of performance for each strategy, industry comment and ranking tables, please open the attached .pdf file.

ATTACHED FILESAFM February performance review (pdf format)

The Aurora Property Buy-Write Income Trust posted its fifth consective month of positive returns, up +0.17% in February.

The Trust, which generates income from writing call options over Australian REITs, recorded this result in a month where REITs underperformed the broader equity index by -11.8%. The manager noted with approval the reduction of target debt levels in the sector, as well as the scaling back of operations to the REITs core businesses (passive rent collecting) and ongoing transparency in reporting.

Another Aurora fund, the Buy-Write Income Trust, gained +1.08% in February. Calls written over Westpac which were exercised during the month produced a positive return, and written calls over Telstra, Newcrest and NAB among others provided additional income. The Trust maintained a high level of cash (ending the month at 76%), and the manager believes the fund will become more invested over the medium term.

The Black Marlin Fund, managed by Shell Cove Capital Management, was down a disappointing -15.61% in February on the back of two mistimed short dated long option volatility positions which were held to expiry. This result brings the Fund's 2009 return to -17.6%, following a positive return in 2008 of +29.15%.

The Fund's US long bond volatility position lost -6.25% during the month, and its resource volatility long position was down -5.93%, which were the main contributors to the overall result. Despite this the manager expressed confidence that their "long volatility strategy will provide positive returns in the future, as it has in the past, although expiry profiles will need to be managed carefully."

Asia Pacific Asset Management's Absolute Equity - Asia Fund, which was consolidated with APAM's Absolute Equity - Australia Fund at the end of January, lost -0.31% in February.

The manager carried out some significant portfolio rebalancing during February as a result of the consolidation. The Fund reduced its exposure to Australian assets, while significantly increasing exposure to Asian hybrids, as well as China-related equity markets. Negative returns came from falls in the markets in Japan and Singapore, although China A-shares gained +4.63%. No specific sector recorded a gain, in fact financials, healthcare, consumer staples and industrials each lost over -10%.

Although there are still net outflows being reported by some Australian Hedge Funds, it appears that December was indeed the peak of redemptions, with one of Macquarie's funds reporting net inflows for the beginning of March for the first time since July last year.

Funds with offshore investors were hardest hit towards the end of 2008 as redemptions were based more on the investors' own liquidity and risk issues than on the underlying manager's performance - although those with particularly poor performance were punished accordingly. With the Madoff related issues hitting fund of funds - especially those with exposure to his 20 year Ponzi scheme - many both received and made record redemptions up to the 31 December deadline.

Further liquidity issues being faced by investors have continued in isolated cases in 2009 - with some of the best performing managers with positive returns over the course of the past year receiving redemptions from liquidity stressed investors.

Against this there are signs the corner has been turned. Macquarie Bank's MQ Asia fund reported net inflows in March following a horror stretch of outflows in the second half of 2008, and other funds are reporting positive signs that investors are returning from the sidelines. AFM are also noticing an increase in site visits and interest from offshore investors from both Asia, Europe and the USA.

The Commodity Strategies Long Only Fund gained +0.21% in February, and is up +0.74% in 2009, while the Long/Short Fund lost -0.26% but is up +1.20% YTD.

The February return for the Long Only Fund was mainly influenced by returns (positive and negative) in metals - nickel and zinc providing strong gains, offset by losses in platinum, silver (NY) and wheat red (KBOT).

The Long/Short Fund, which is leveraged 1.5 to 1 for long positions and 0.6 to 1 for short positions, made significant losses in zinc and nickel, among other commodities. Positive returns in platinum, cotton and cocoa were not enough to prevent an overall negative return for the month.

After almost six months of investigations, Australia's corporate regulator ASIC has finally claimed a scalp - that of a 32 year old stockbroker, Richard Macphillamy, who emailed clients at the height of the market panic just 2 days after the collapse of Lehman's to warn of a run on Macquarie Bank's cash management trust (CMT).

The ban comes 12 months after ASIC announced Project Mint, designed to stamp out illegal market manipulation, and while they are themselves rumoured to be working on additional cases, there are some interesting aspects to the case.

ASIC stated that "in Macphillamy's favour is the fact that there is no evidence that he had any dishonest purpose or manipulative behaviour."  At the time, Lehmans had collapsed two days before, UBS had issued a downgrade on Macquarie a few weeks before, and JP Morgan issued a report the day after stating that Macquarie's model was "irretrievably broken."

No doubt the question will be asked in many brokers' offices what their job is, if not to inform clients about market "information"?  We suspect there will be a very fine line between information and rumour, and as John Durie of the Australian noted in today's edition "if the guy was just passing on the market gossip of the day, his penalty is too harsh - in fact you wonder why he was even hauled over the coals."

ASIC needs to find a party that has actually done what they are looking for - maliciously spreading rumours known to be false with the intent of profiting from the resultant price move.  And make sure it is enforced in both bull AND bear markets.

Absolute Asset Management's Asian REIT Property Fund lost -9.89% in February on lower global equity markets, outperforming the Bloomberg Asia REIT Index by +6.64%.

Only the Malaysian Amanah Harta Tahah 2 (up over 20%) and the Ascendas India Trust reported gains during the month. The Fund continued to decrease its exposure to Australian REITs, as the sector outlooks remains negative, thus increasing the Fund's cash holdings. The manager however believes the Asian REIT sector remains undervalued, with dividend yields ranging between 10% and 17%, and therefore represents excellent long term value.

Absolute's other funds, the Macro Diversified Fund and Absolute Trading 1 Fund, both performed significantly better in February than the REIT Fund, down -2.43% and up +0.58% respectively.

The Allard Growth Fund lost -6.6% in February, while the Allard Investment Fund was down -7%. As equity long only funds both were badly affected by ongoing weakness in Asian equity markets.

These results bring the 12 month return for the Growth Fund to -34.9%, and the Investment Fund to -11.9%. The manager noted that internet based businesses the Funds were invested in are increasing their market share over their non-internet based rivals, a Korean internet content service operater for example reporting an operating profit up +26%. Another trend has been the increasing pressure on smaller, weaker players in the Hong Kong and Chinese manufacturing industries. The manager will continue to monitor these trends to identify entry points for investment.

The BlackRock Asset Allocation Alpha Fund (Class D) was up +1.85% in February, the seventh consecutive month the Fund has recorded a positive return.

This result brings the Fund's three month return to +4.86% and 12 month return to +29.76%. The main driver of returns was the Fund's equity/cash strategy - short positiions in US, German and Australian equities, while currency strategy (incorporating short positions in AUD and NZD) detracted from performance. The manager continued to favour a risk averse stance, focusing on short equities (48% of portfolio risk), long bonds (33%) and short commodities currency strategies (14%).