Australia's Reserve Bank defied the market's and most economists' predictions by leaving official interest rates on hold (at 3.75%) at today's monthly RBA board meeting.

The widely held view was that the RBA would increase rates for the fourth time in as many meetings (the RBA board meets on the first Tuesday of each month with the exception of January). However, had they done so, it would have been unprecedented for them to move rates upwards at four successive meetings.

In the Bank's statement RBA Governor Glenn Stevens noted the unexpected strength of the local economy compared with conditions just 12 months ago, but against this cited the removal of the government's fiscal stimulus, and the fact that banks have already increased rates to borrowers by almost 1% more than the 0.75% increase in official rates since October 2009.

However, the final paragraph of the Bank's statement was clear in pointing out that rates remained lower than historical averages, and that if economic conditions continue to evolve as expected, monetary policy will need to be adjusted further to ensure inflation remains consistent with the target over the medium term.

In other words, borrowers can probably only breathe more easily for a month or two at the most.

Australian Fund Monitors has just released the November Absolute Return and Hedge Fund Review. Results for October were generally flat, but this still represents outperformance of around 2% when compared with equity markets.

This month we've taken a look at the "best of the best" equity funds to come up with a Model Portfolio. The results show an impressive performance: A portfolio of 10 locally managed and domiciled equity funds with an annualised return of 14.43%, a standard deviation of just 5.53%, a Sharpe ratio of 1.45 and a maximum drawdown of -5.65%.

Over the same three year period the ASX200 returned a negative -3.32%, a drawdown of over 50% at one stage, a negative Sharpe ratio, and volatility of over 17%.

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

ATTACHED FILESNovember absolute return and hedge fund review (pdf format)

Better performance, half the volatility. Why the bad name?

What a difference a year makes! Or maybe that should be half a year?

A little over six months ago the financial world as we knew it was in disarray, and with it, equity markets. And, according to some loud and strident voices, hedge funds were, if not to blame, well....at least a great target.

Come September and the rally continued, with the ASX recording a gain of over 5% for the fifth time in seven months, and the average performance of Australia's hedge funds tagged along for the ride with AFM's index rising 2.34%. However, behind the headline statistic there were some standout performances, even if some of September's stars were playing catch up after a forgettable 2008.

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

ATTACHED FILESOctober absolute return and hedge fund review (pdf format)

The Australian Securities and Investments Commission (ASIC) issued an urgent stop order forcing Trio Capital, formerly Astarra Capital, to remove the product disclosure statements for its Astarra managed funds from its website, according to a report in the Sydney Morning Herald.

However there are scant details available, as ASIC have been barred from releasing details of charges laid in the New South Wales Supreme Court against two directors of one of the funds involved.

Further confusion arises in what seems to be a complex corporate structure of related entities between Astarra and Trio.

The Sydney Morning Herald has reported on the potential for ASIC to ban products considered "unsuitable" being distributed to retail investors.

Quoting the chairman of ASIC, Tony D'Aloisio from a speech he delivered last week, in addition ASIC's submission to the parliamentary committee investigating the financial industry, the paper reported that ASIC had concerns that the current consumer safeguards of education and improved disclosure were not necessarily providing protection for all consumers.

The change to ASIC's stance comes after concerns following a series of issues where products have been allowed to be sold to retail investors because they conformed to the risk disclosure regulations, without really considering the suitability of the product for the individual investor.

ASIC has also recently been active (and successful) in prosecuting financial advisors who had recommended clients invest in products which subsequently failed.

Click here to view the full article.

The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, has released draft regulations and commentary material in relation to the disclosure of short selling information under the Corporations Amendment (Short Selling) Act.

The new regulations maintain the existing requirement for sellers to advise the broker when placing an order for a short sale, for the broker to advise the ASX of all short sales transacted for each stock the same day, and for the ASX to publish the information by 0930 the following morning.  This will be known as Transactional Reporting which has previously been criticised for not showing net short positions.

Added to this will be a new level of reporting to be known as Positional Reporting, to come into effect on 1 April 2010.  Under this regulation each seller will be required to advise ASIC of each short position they hold within three days of taking that position, and each day thereafter that the position remains short.  ASIC will in turn aggregate this information and publish net short positions the following morning.

The Minister has called for submissions from interested parties on the new regulations, with a closing date of Friday 23rd October.

The Cumulative Performance chart on page 1 starkly illustrates the role of absolute return strategies in reducing the volatility of equity markets. Like insurance, the cost of the "hedge" to protect large down side moves will inevitably have a negative effect in strong bull markets.

Over the past few years, and prior to 2008, some funds' solution to that problem was leverage. Sadly, leverage can have dangerous results in sharply falling markets in the wrong hands.

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

ATTACHED FILESSeptember absolute return and hedge fund review (pdf format)

AFM’s Equity based absolute return index looks set to better its previous high water mark, with the index now positive over a 12 month basis, against the ASX200 which is still down over 12% since 1st September 2008. Once again August results from some high conviction managers, particularly those who suffered during the GFC, were particularly pleasing with some returning over 10% for the month.

Australia's equity based Absolute Return funds posted positive performance for investors of 4.51% for the month of July, taking 2009 year to date performance to 12.69%, closely matching the ASX200 accumulation index which has returned 14.03% YTD. Over a 12 month period the ASX has still lost 14.73% whilst equity based absolute return funds are down just 1.90%.

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

ATTACHED FILESAugust absolute return and hedge fund review (pdf format)

June saw a continuation of positive results for the Australian absolute return and hedge fund sector, largely on the back of an ongoing rally in equities, particularly the ASX 200. Although AFM's index was positive, outperforming the S&P 500 and the MSCI World ex Australia index, it underperformed the ASX 200 which rallied 3.59% as confidence continued to flow back into investors.

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

ATTACHED FILESJuly 2009 absolute return and hedge fund review (pdf format)