Absolute Return funds surveyed by AFM have started to report their October results and preliminary analysis indicate it was another difficult month for the industry with quite diverse results. To date the average return for the month is -3.54% (based on 35% of funds in AFM's database having reported) compared to September's average result of nearly -5%.

The best performing strategies have been non equity based (i.e. Commodities, Currencies and Managed Futures). Equity based strategies have suffered but still on average outperformed the underlying equity benchmarks with the S&P/ASX200 Accumulation Index ending down 12.61% for the month and the S&P500 Total Return Index down 17%.

At an individual fund level, the best result reported has been Argus Capital Management Pty Limited with their Dynamic Multi-Strategy Program returning 11.77% in commodities. Fortitude Capital continues its unequalled record of positive returns every month this year achieving 3.12% for October in it Absolute Return Trust using an equity market neutral strategy.

Australia's Absolute Return and Hedge funds continue to outperform their Equity Fund peers. As reported in the Australian Financial Review, "the median [equity] fund posted an 11.3 per cent loss in October, bringing losses over the past 12 months to 35.7 per cent according to Mercer Investment Consulting." It was further reported, the best equity fund return for October was negative 6.1% while the worst return was negative 18.3%.

Wallace Australia Opportunities Fund, a Cayman based Equity Market Neutral Hedge Fund with a 3 year track record, has overcome the worst equity market performance since October '87 and restrictions on short selling to return investors 8.15% for October, (preliminary results) bringing YTD 2008 results to +39.9%.

All profits were made in the long/short portfolio which returned +8.87%, whilst the Event Driven portfolio recorded a small loss of -0.72%.

The fund was established in October 2005 and has returned 21.62% annualised over its three year track record. Wallace also manages an Australian Listed Investment Company (LIC).

Apeiron's Global Macro Fund has continued the recent positive performance, returning +5.21% after fees in October, as a follow up from September's performance of +7.22%. On a 2008 YTD basis the fund has returned an impressive 19.81%, in line with their annualised return since inception in February 2006 of +19.47%.

Apeiron's performance report indicated that the result was achieved in spite of remaining heavily weighted towards cash, with remaining exposure predominantly on the short side, and as a macro manager trading futures and FX markets, not inhibited by the equity short selling bans.

Bennelong's Long/Short Equity Fund has produced a positive result of +3.78% in October, with the manager lamenting the lost opportunities associated with the ongoing short selling ban.

In the latest monthly comment, the Manager's view is that there is likely to be further deleveraging as domestic corporate and household sectors have not yet sufficiently reduced leverage from the previously grossly inflated levels, and that this will possibly lead to further disorderly (i.e. forced) debt reduction.

Bennelong has been one of the best performing Equity Managers in the Australian market this year with performance YTD of 7.92%.

Pengana's Australian Equities Long Short fund lost 13.5% net after all fees in October, bringing their 6 month performance to -21%, vs the ASX300 Accumulation Index which fell 12.9% in October, and has fallen 26.9% over the past 6 months.

Pengana manages a range of funds, which struggled in October's unprecedented volatility.  The Pengana Global Resources Fund fell over 12%, following  a fall of -20% in September.

Pengana's Global Volatility Fund, which was launched with much fanfare in November 2007 and initially performed well in the first half of 2008, appears to have ceased reporting returns.

Platinum Asset Management, Australia's largest Absolute Return fund manager with over $14b in total assets under management, provided investors a range of returns for October, with the flagship Platinum International Fund, a global equity long/short fund with over $7 billion in FUM recording +1.30% for the month.

On a monthly basis, Platinum's Japan Fund was their best performer, returning 5.00%, whilst their European Equity L/S fund was the worst performer with a negative 12.30%.

Regal's Amazon and Tasman Market Neutral Funds fell -1.26% and -4.15% respectively in October against a backdrop of a fall of 14% in the ASX, as long standing short positions continued to work well in the weak overall market.  However, positive performance from the short positions in both funds was not sufficient to offset one long position which fell over 50%.

Regal Funds Management was established by Andrew King in January 2004 and manages four funds.  The Amazon Fund was established in September 2005 and has an annualised return of +21.69% since inception, while the Tasman Fund was established in May 2007 and has an annualised return since inception of +12.39%.

Headland's Global Diversified Fund completed 24 months track record with a positive October performance of +0.22%, bringing 2008 YTD to +1.31%, after moving substantially to guaranteed bank deposits to avoid the risk of volatile markets.

Citing extreme volatility in multiple markets, Headland's CIO Jerry Pressnell remained committed to capital preservation with 98.8% of the Fund's assets in bank deposits covered under the Australian Government's recent guarantee.

Headland has returned 8.28% annualised since inception and invests in bonds, currencies and commodities to provide wholesale investors an alternative strategy designed to provide a low correlation to equities.

Australia's Absolute Return & Hedge Funds continued to weather the storm in financial markets and outperform the broader equity benchmarks to the end of September, in spite of losing -8.68% on a year to date (YTD) basis. The ASX200 was down nearly 25% during this period, while the average September hedge fund return in AFM's database of over 200 funds was down -4.78% vs. the ASX200’s loss of 9.85%.

This year Hedge Funds have had to navigate the credit crisis and volatile markets, massive deleveraging and more recently the sharp selloff in commodity prices all of which have combined to see some funds to report significant negative returns. However, against that 24% of local funds have achieved a positive return year to date, and 19% were positive in September. 87% of funds in our database have outperformed the ASX200.

In addition Australian managers have also had to handle political and regulatory volatility, as the local regulator, ASIC, went well beyond their offshore counterparts by banning all short selling, and then reversing that decision with a series of amendments. Policy on the run has not made life easier for managers, or returns better for investors. Some semblance of clarity has returned with a new set of guidelines (mainly enforcing transparency of short positions) due to come into effect on 19th November, although short sales in Australia’s financial sector remain restricted until late January.

To read the full report download the file below.

ATTACHED FILESAbsolute Return & Hedge Fund Performance Review September 2008 (pdf format)

Everest Babcock & Brown (EBB) has released a statement in relation to media speculation around a possible sale of its hedge fund business. The Australian Financial Review had previously reported that an announcement on a sale was expected to be made within a month.

In the release, EBB stated: "As previously announced to the market, EBB continues to consider strategic partnerships with institutions and funds management businesses both in Australia and internationally. This process may result in the sale by existing shareholders of their holdings in EBB, or the full sale of EBB."

These discussions have progressed but there is no certainty that any agreement will be reached. We are therefore unable to comment on when or if any potential transactions will occur."

Australian Fund Monitors currently tracks the performance of nine (9) absolute return (or hedge) funds managed by EBB.