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)

Foreign exchange specialist Excalibur Funds Management completed its three year track record in June. The Absolute Return Fund which uses a combined systematic and discretionary investment process has an annualised return of 19.7%.

The manager makes extensive use of options to protect downside risk. "It's been a tough environment in currencies over the past 12 months, we've really had to focus on managing the risks for investors," commented Excalibur principal Matthew Harper. The Fund has a three year risk adjusted return (Sharpe ratio) of 1.37.

Excalibur received strong inflows during the month with assets under management topping AUD$100mn. A further AUD$40mn of capacity has been locked in by a Hong Kong based Fund of Fund. The manager plans a hard close at AUD$300mn.

Three new Funds have commenced reporting this month, two focused on Asian Equities, the third on Global Macro trading strategies.

Pegasus Absolute Returns Fund

Pegasus uses fundamental and technical research to establish arbitrage and spread positions in physical and derivatives markets. The portfolio is managed by Andrew Lythgo who was formerly with Bankers Trust Australia and also a private trader (local) on the floor of the Sydney Futures Exchange. Pegasus's management include Russell Johnson, managing director of Sonray Capital Markets and Tony O'Grady formerly General Manager of NAB custodian services.

Kima Capital Pan Asian Long/ Short Fund

Kima is a multi-strategy Asian Long /Short Fund managed by Justin Klintberg. The Fund is targeting 15% returns with low volatility using Arbitrage, Event Driven and IPO/ Secondary Block strategies. The management team includes Michael Gallagher, formerly head of equities at RMB Australia and Nishant Narayanaswamy formerly with ANZ Investment Bank. Prior to starting Kima Capital, Justin spent 7 years with Marble Bar Asset Management managing Long / Short equities strategies.

QIC Asia Pacific Market Neutral Fund

QIC's Asia Pacific Market Neutral Fund uses a quantitative systematic investment process to select a diversified portfolio of Asian equities. The Fund has a mandate to select stocks from a very broad universe across the entire Asia Pacific region. The investment team includes Michiel Swaak, formerly a Founding member and Associate Director of Macquarie's MQ Asset Management , Joe Cole and Tim Sharp. The Fund has been seeded through QIC with AUD$20 million.