Although too early to say definitively, it is hoped that direct repercussions (i.e., Investments) by Australian hedge funds, fund of funds and other local investors in former US "Investment Guru" Madoff's so called "Ponzi" scheme will be minimal.

As of 15th December, two local Fund of Funds, Everest, and Select/Gottex have categorically denied having any investment or exposure to Madoff's extraordinary US$50 billion fraud.

However, there is no doubt that further confidence will be eroded in the eyes of ordinary investors in the top end of town, with this scam following on a series of disasters involving both overseas and local former high flying names.

Equally expect the surveillance of unregulated funds (a greater issue in the US than Australia) by the authorities to increase significantly.

Macquarie has written to investors with the news that as of 28th November, redemptions in their Equinox Series Fund of Funds have been suspended until further notice. Redemptions for 31 October will be processed, but all others, including those for November 28th, are included in the suspension.

Macquarie's letter to Equinox shareholders cited difficult (but now well known) issues affecting underlying managers, who themselves have been limiting or freezing redemptions. This poses a major issue for the Fund of Funds model with liquidity dependent on underlying assets which are themselves illiquid.

As a result there is, and will continue to be, a "cascade" effect as investors seek liquid assets, which in themselves are becoming an increasingly rare commodity.

Macquarie also noted other reasons for the problem, including falling interest rates damaging the mechanism for capital protection, and a falling Australian dollar affecting the value of predominantly US$ underlying investments, as well as impacting the A$/US$ currency hedges employed. Finally, the portfolio employed leverage between 10% and 20% of NAV, and this loan facility had been withdrawn and in current conditions was unable to be replaced.

Absolute Return funds surveyed by Australian Fund Monitors (AFM) that have reported November results indicates it was a
much improved month for the industry with quite diverse results. To date the average return for the month is negative 2.51% with 37% of funds in AFM's database having reported.

The best performing strategies have again been non equity based (i.e. Global Macro, Commodities, Currencies and
Managed Futures). Equity based strategies have suffered less than in September and October, significantly outperforming
the S&P/ASX200 Accumulation Index and the S&P500 Total Return Index which fell 6.20% and 7.18% respectively for the
month.

Click the link below for the full report.

In a statement to the ASX, the listed absolute return fund HFA Accelerator Plus Limited (HAP) has announced an Asset Realisation Program in which it will redeem all of its leveraged instruments (i.e. notes and swaps). HAP is undertaking the program in order to protect shareholder value in the current environment.

HAP stated: "The HAP investment model is predicated on leveraging HAP's capital 3 times as an investment in the Lighthouse Diversified Fund, a diversified offshore fund of hedge funds.

The HAP model was designed to provide superior returns in a wide variety of hedge funds with different investment strategies. The model was successful during periods of high capital market liquidity and market confidence in the global economy. However, the HAP model has underperformed during the sustained deterioration of global capital markets over the past 12 months."

HAP is listed in the AFM database under a Global Diversified strategy and recorded a return of negative 20.89% in October bringing its year-to-date (YTD) return to negative 52.79%.

To read the full statement, click here.

The Reserve Bank issued the following statement at 14:30 AEST Tuesday 2nd December 2008:

"At its meeting today, the Board decided to reduce the cash rate by a further 100 basis points, to 4.25 per cent, effective 3 December 2008.

Recent actions by governments and central banks to stabilise their respective financial systems have begun to take effect. Nonetheless, financial market sentiment remains fragile, as evidence accumulates of weak economic conditions in the major countries and a significant slowing in many emerging countries. Commodity prices have fallen further. This, combined with the likelihood of below-trend growth in the global economy, suggests that global inflation will moderate significantly in 2009.

The Australian economy has been more resilient than other advanced economies, but recent data nonetheless indicate that a significant moderation in demand and activity has been occurring. With confidence affected by the financial turbulence and a decline in the terms of trade now under way, more cautious behaviour by both households and businesses is likely to see private demand remain subdued in the near term. With that outlook, and with capacity pressures now easing, it is likely 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 have been the case.

Weighing up the international and domestic developments of recent months, the Board judged that a further significant reduction in the cash rate was warranted now, to take monetary policy to an expansionary setting. As a result of today’s decision, the cash rate will be at its previous cyclical low point. Given trends in money market yields, most lending rates should fall significantly and will also reach below-average levels.

There has now been a major easing in monetary policy over the past few months. Together with the spending measures announced by the Government, and a large fall in the Australian dollar exchange rate, significant policy stimulus will be supporting demand over the year ahead. 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."

October was another difficult month for Australia's Absolute Return and Hedge Fund sector with widespread deleveraging across the globe and across almost every investor group and asset class.

The average October return of single managers across the sector was negative 5.04% with 86% of single managers’ funds having reported to date. This made October the worst month this year for the sector. On a year-to-date (YTD) cumulative basis the performance of the average Absolute Return fund in the database is negative 12.30%.

Positive returns were achieved by 28% of the sector while 81% of the sector outperformed the benchmark S&P/ASX200 Accumulation Index. The ASX200 fell 12.61% for the month, and according to Mercer Investment Consulting the median Long Only fund lost 11.3% in October, and 35.7% over the past 12 months.

To read the full report download the file below.

Eclectic Capital Management, a Melbourne based Equity Long/Short manager established in 1999 has closed as at the end of September,and returned all funds to investors.

Eclectic's performance to the end of September was -4.2% YTD, well above the benchmark of the ASX200, and broadly in line with the AFM Hedge Fund Index. However, Eclectic's August performance report noted that "investing in this market is like driving a land cruiser down the Nullabor and hitting rumble strips. You can get through but it's not much fun, and it's not good on the nerves."

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.

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.

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.