Hedge fund assets will increase by 11% in 2013 to an all-time high of $2.5 trillion, according to the 11th annual Alternative Investment Survey from Deutsche Bank.

Almost 60% of institutional investors surveyed increased hedge fund allocations in 2012, including two-thirds of pension fund respondents. Sixty-two percent of all respondents expect to increase hedge fund assets this year.

The 11% anticipated increase this year is attributed to $123 billion in net inflows and $169 billion in performance.

Almost half of pension fund respondents are expected to increase hedge fund allocations by $100 million or more this year. Emerging markets, event-driven and global macro hedge funds are the most popular type of strategies pension funds are seeking this year.

Read the entire article from Pensions & Investments here.

Amongst the renewed optimism that has taken hold of Australian equity markets it is often overlooked that the ASX200 has only had one negative return in the last fourteen months. Most investors recognise that the current rally began last July, but forget the pessimism that permeated the market in the first half of 2012.

With this in mind it is worth reading AFM's reviews of the absolute return sector in Australia, one covering 2012, and the other taking in longer term over five and ten years. Most readers will be aware that in 2012 the equity market (as measured by the ASX200 Accumulation Index) outperformed both the average and the majority of funds, but over the longer term the picture is quite different.

The five and ten year review, entitled Volatility eats Returns, shows that over five years the average fund (net of fees) clearly outperformed the ASX200 Index with less volatility, while over ten years funds and the ASX200 Accumulation Index both returned 10%, but once again funds had half the volatility.

The devil of course is in the detail, and the use of averages. The best performing funds can, and do provide the "high return, low risk" returns the marketing likes to promote, while the worst provide the hedge fund headlines the media love to quote. And just to confuse the issue, different strategies and funds perform differently in differing macro economic conditions. Finding the elusive all weather performer is not easy.

Both reports are available here.

Enjoy your week-end.

Regards,

Chris.

Absolute Return and Hedge Fund Performance over 5 & 10 Years.

As we reflect on the performance of Absolute Return and Hedge Funds over the past five and ten years, and show in the following analysis, "Volatility eats Returns" .

In fact, if 2012 was a year of two halves, so too was the previous decade.  For the first five years, from 2003 to 2007, equity investors could do little wrong as they overcame, and then forgot the lessons of the dot-com bubble, just as they had forgotten the previous lessons from LTCM, the Asian Currency Crisis and October 1987 amongst others.

For five years from 2003 to 2007 the ASX200 accumulation index had no problem notching up returns of 20% per annum, supported by easy credit, and lax lending at both corporate and personal levels, and volatility fell accordingly.

Read the entire report from Chris Gosselin, Australian Fund Monitors here.

ATTACHED FILESAFM's Five and Ten year Performance review to 2012 (pdf format)

2012 Performance Review:  Australian Absolute Return Funds

To use a sporting term, 2012 was a year of two halves for equity markets in Australia.  "Risk on" dominated for much of the year as Europe and the Euro threatened to unravel courtesy of debt levels in Greece, Spain, Italy and Portugal.  For much of the year the jury was also out seeking clarity on the prospects of a hard or soft landing in China, with iron ore and coal prices suffering accordingly.

However as the second half proceeded risk averse investors were reassured by the ECB "whatever it takes" policy.  At the same time, with the Fed continuing to crank the monetary presses, the US economy showed tentative signs of life, and initial jobless claims continued to fall - albeit frustratingly slowly. In time (just) the Fiscal Cliff was averted, and by the end of the year it seemed that China was not only avoiding a hard landing, but resuming growth.

Australia's equity market also alternated between risk on and risk off, only partly in response to these global influences. What seems difficult to reconcile is that in this environment of fluctuating risk the ASX200 Accumulation Index only suffered one negative month in 2012. 

To read the entire report by Chris Gosselin, please click here.

ATTACHED FILES2012 Performance Review (pdf format)