By: Australian Fund Monitors

The average October return of Absolute Return funds in AFM's database stands at negative 4.32% with 61% of funds having reported to date. Of all funds so far reported 31% have achieved positive returns while 86% have outperformed the S&P/ASX200 Accumulation Index during October.

The non equity based strategies of Global Macro, Commodities, Currencies and Managed Futures averaged positive returns for October, while the equity based strategy of Equity Market Neutral also averaged a small positive gain. On a year-to-date basis Commodities remains the best performing strategy on average.

At an individual fund level, the best result reported to date has been Argus Capital Management Pty Limited with their Dynamic Multi-Strategy Program returning 11.77% in commodities. Fortitude Capital continues it's 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.

Overall Performance of Funds in AFM Database*	Sep-08	Oct-08	YTD 08	Number of Funds in Index	% of Funds Reported
AFM Australian Hedge Fund Index (All Funds)	-4.73%	-4.32%	-10.98%	223	61%
Equity Based Funds	-5.45%	-6.04%	-14.28%	120	77%
Non Equity Based Funds	-3.86%	-0.57%	-7.03%	103	41%
Fund of Funds	-7.56%	-9.57%	-16.12%	54	19%
Single Funds	-3.82%	-3.90%	-9.43%	169	73%
* Notes 1.  61% of funds in AFM database have reported October results to date. 2. YTD cumulative figures include funds not yet reporting latest results.                          3. The AFM Indices are calculated using a simple average (arithmetic mean) of all Australian-based funds in the database.

By: Australian Fund Monitors

The Reserve Bank of Australia released the minutes of its most recent board meeting held on November 4, at which they handed down the decision to cut official rates by 0.75% to 5.25%.

The five pages of minutes made for gloomy reading, with hardly any positive indicators noted either in Australia or overseas. As such it was hardly any wonder that the board cut rates by 75 bps -- maybe the real surprise was that they didn't go further.

All eyes will now be on the Reserve's next meeting due to be held on Tuesday, December 2. As the Board does not usually meet in January, they will need to make a decision then to carry through Christmas and the January holiday period.

No one in the market will be surprised to see a further 75 bps, or even a full 1% cut at that stage, given that the outlook described in the board's minutes does not seem to be improving.

By: Australian Fund Monitors

The federal government has presented a revised bill to parliament which will permanently ban naked short selling. An interim ban on all forms of short selling (with certain exceptions) has been in place since 21 September 2008 but ASIC has announced, as planned, it will lift its ban on the short selling of non-financial stocks from 19 November 2008. The ban on covered short selling of financial stocks remains in place until the 27 January 2009.

In conjunction with this legislation the industry regulator ASIC, together with the market body ASX, has outlined the reporting and disclosure framework for the practice of covered short-selling. There has been much discussion in the media that this framework is inadequate in that it only requires the reporting of daily gross short sales. In effect this will not indicate the aggregate number of short sold positions with the buy-back of stock to close out the short positions being taken into account.

In relation to this issue, the Australian arm of the Alternative Investment Management Association (AIMA) has stated that: "Interim measures designed to only capture daily trade data will give no transparency into the size of the short interest in a listed company, or the rate of change in the short interest. Reporting small daily trade data will significantly distort the actual shorting activity in a company's stock as it fails to disclose position size and its implied impact on the stock's price behaviour."

To read the full ASIC Statement, click here.

By: Australian Fund Monitors

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%.

Top 10 Performers*	Strategy	October 2008
Argus Dynamic Multi-strategy Program	Commodities/CTA	11.77%
Macquarie FX Volatility Segregated Portfolio	Currency/FX	9.45%
Global Commodity Long / Short Fund	Commodities/CTA	8.77%
GMO Global Tactical Trust	Global Diversified	8.44%
Wallace Australia Opportunities Fund	Equity Market Neutral	8.15%
Attunga Agricultural Trading Fund	Multi Strategy	7.12%
Zone Capital Trading Trust 1	Managed Futures	6.60%
Absolute Trading 1 Fund	Currency/FX	5.96%
Apeiron Global Macro Fund - Class A	Global Macro	5.21%
Platinum Japan Fund - AUD	Equity Long/Short	5.00%
*35% of funds have reported to date

 

By: Australian Fund Monitors

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.

By: Australian Fund Monitors

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.

By: Australian Fund Monitors

The Reserve Bank issued the following statement at 14:30 AEST Tuesday 4th November:

"At its meeting today, the Board decided to reduce the cash rate by 75 basis points to 5.25 per cent, effective 5 November 2008.

World financial markets have remained turbulent over the past month. Global equity prices have been volatile and fell further in net terms, and there have been significant exchange rate movements, including a sharp depreciation of the Australian dollar.  A number of governments have announced measures to strengthen their financial systems, which should help to stabilise conditions over time.

International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well. These conditions have contributed to further falls in world commodity prices.

In Australia, the overall path of economic activity appears until recently to have been close to what the Board had expected, with a needed moderation in demand occurring after a period of earlier strength. Recent reductions in borrowing rates, the depreciation of the exchange rate and the fiscal stimulus announced in October will work to assist growth in the period ahead, but deteriorating international conditions and falling commodity prices will have a dampening influence. On balance, it appears likely that spending and activity will be weaker than earlier expected.

Consumer price inflation in Australia remained high in the September quarter. As expected, CPI inflation in year ended terms picked up to 5 per cent, while underlying measures were just over 4½ per cent.  Nonetheless, capacity pressures are now easing and, given the outlook for more moderate growth in demand and activity, it is reasonable to expect that inflation in Australia will soon start to fall. Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of inflation to the target could take longer than would otherwise be the case.

Weighing up these international and domestic developments, the Board judged that a further significant reduction in the cash rate was warranted. The Board will continue to monitor developments and make adjustments as needed to promote sustainable growth consistent with achieving the 2-3 per cent inflation target over time."

By: Australian Fund Monitors

ASIC has outlined requirements for short selling disclosures that will become effective from the 19 November 2008 when the ban on shorting non-financial securities is lifted.

ASIC said in their statement "the disclosure and reporting arrangements provide additional transparency on the amount of short selling in Australian securities to participants in financial markets, the market regulator (ASIC) and the market operator (ASX). ASIC and ASX will use this data together with information about trading and market positions in traded securities to assist in detecting market manipulation and other non-compliance with existing obligations."

Disclosure Requirements

Clients are required to inform a financial services licensee (i.e. their broker) when a sale order is for a short sale and trading participants are to ensure they have a system in place to record sell orders as follows:

1. Long Sale - a sell order from a client where they already own the securities;
2. Short Sale - a covered short sale (i.e. in non-financial securities); or
3. Exempt Short - a covered short sale which falls under one of the exemptions to the ban (e.g. a qualifying short sale in financial securities, a naked short sale arising from the exercise of exchange-traded options);

Obligations to report short sales that are otherwise allowable under sub-section 1020B(4) of the Corporations Act 2001 are unchanged.

Reporting

Trading participants will report to ASX each business day all short sales, including Exempt Short sales. Initially this will be a daily report submitted by 9:00am capturing all short sales executed up to 7:00pm on the previous trading day.

Market Disclosure

ASX will produce and disseminate a report to the market that will be released after 9:00am each trading day. The report will show, by security, the total volume of short sales executed on the previous trading day. The report will include Exempt Short sales in financial sector securities.

By: Australian Fund Monitors

Everest Babcock & Brown (EBB) has suspended redemptions in its Income Fund and is reviewing its other wholesale funds in light of redemption requests from investors and the impact of the global financial crisis.

The EBB Income Fund (EBBIF) is yet to report September results but the YTD return as at August was negative 0.20%.

EBBIF was established to invest in high yielding, reasonably predictable, income producing investments and securities. The investment objective is to provide net pre-tax income returns in the order of 10% per annum which may be complemented by longer term capital appreciation. Investments are predominantly sourced from, but not limited to, Babcock & Brown deal flow.

EBB Statement

Everest Capital (ECL), a wholly owned subsidiary of Everest Babcock & Brown (EBB), is the responsible entity, trustee and/or manager of 18 wholesale funds with differing investment objectives and strategies. A review is currently being undertaken of each of these funds to assess the impact of the current adverse market conditions and redemption requests upon the ongoing conduct of these funds. No decisions have been made with respect to any fund other than as set out below. EBB will keep the market informed as and when decisions are made that are relevant for EBB investors.

In its capacity as responsible entity of the unlisted wholesale Everest Babcock & Brown Income Fund (EBBIF or the Fund), ECL has informed EBB of its decision to suspend redemptions of units in EBBIF with effect as at the close of business yesterday until further notice. EBBIF currently accounts for approximately $180 million in funds under management.

The decision to suspend redemptions was made by ECL, recognising the adverse impact the current market conditions have on EBBIF’s portfolio of subordinated debt investments and the impact of a large number of redemption requests.

The ECL Board has advised EBBIF investors that it is in the process of reviewing the ongoing operation of the Fund. This review includes the consideration of possible termination of the Fund and of incremental pro-rata cash distributions to unitholders as investments are progressively realised. It is expected that unitholders will be informed about the outcome of the review process in the next few weeks.

By: Australian Fund Monitors

Feedback from two recent hedge fund conferences, one in Hong Kong and one in Sydney, have confirmed that the next three months will create significant challenges for hedge fund managers around the world.

As a result of the crisis in all financial markets, and the damage done to corporate balance sheets around the world, there has been widespread deleveraging as investors, banks, investment banks and other financial institutions rush to get their balance sheets in order, and reduce debt wherever possible. One keynote speaker at the AsiaHedge conference in Hong Kong last week claimed that investment banks had increased their leverage over the past few years from a factor of 10 times to over 40 times. This was now in the process of being unwound. In addition many of those investment banks operate (or operated) prime broking facilities for hedge funds, which also included leverage of up to 5 to 10 times for the underlying funds in some instances .

Many hedge funds and fund of funds, especially the large ones based in the US and Europe, operate with 12 month lock-ups to 31 December each year, and also require 90 days notice for redemptions. Those redemption notices will have hit at the end of September and reports are coming through which indicate that possibly 25% or more of investors' funds might be recalled either through necessity or in order to reallocate to other managers or strategies.

Very few of these have been made public as yet, and it is unlikely that too many managers will want to publicise the fact for fear of triggering additional redemptions from other investors. However it is more than likely that some managers will invoke the gate clauses in their management agreements, and halt redemptions come 31st of December or otherwise face the prospect of closing the shop.

In any event the de-leveraging that has been such a powerful downward force in equity markets over the past 3 to 6 months is likely to continue. Hedge fund selling to meet redemptions will add to the downward pressure and certainly create some headlines in the media.