Focus on the Facts

May's performance data is behind us, but reflecting on it will serve to show the risk averse nature of absolute return funds in general. Against the ASX 200 accumulation index which fell 4.5%, (cutting year-to-date performance to just 5.4%) AFM's index of all funds rose by 0.36%. 

Drilling down through this data on a regional basis is not quite as compelling, with funds investing domestically in Australia losing an average of -1.53%, although still an outperformance of 3% above the index. However it does bear out our previous view that with the A$ falling out of favour, local investors would benefit by looking for funds investing offshore.

Although just 7% of June fund returns are to hand, June performance is not looking as positive, with an average fall of 0.91% against the ASX 200 accumulation index fall of 2.32%. However it again indicates the potential defensive nature of the sector.

With that in mind we are always surprised that hedge funds are typified as risky. Certainly there are some that have shown significant risk, while there are others that have performed in line with expectations, and some outstandingly. Over 12 months fund returns in AFM's index have ranged from -59% through to +66%.

Recently to overcome the misconception that that there was limited choice of funds for retail investors we analysed the performance of funds with minimum investments of $50,000 or less on behalf of Alan Kohler's Eureka Report. The facts are that over 50% of the funds in AFM's database have minimum investments of $50,000 or less, and of those three quarters have minimum subscriptions of $25,000 or less. Full details of the analysis are available here.

The issue for retail investors therefore is not so much availability, as suitability, with the more complex investment strategies demanding greater understanding by investors, and therefore additional research and due diligence. Unfortunately the quality of some research recommendations available to retail investors has in our opinion been lacking, and in some cases out of date.

Guaranteeing or even predicting the future performance of managed funds is difficult, if not impossible. Analysis of their past performance, and in-depth analysis of processes and systems, while easier, provides some indications, but still requires a critical and quantitative approach. On the occasion of the Guardian newspaper's 100th anniversary in 1921 the editor C P Scott wrote "comment is free, but facts are sacred", a tag line the newspaper retains to this day.

Unfortunately some research on managed funds focuses excessively on comment (and opinion), and insufficiently on the facts.

Performance and News Updates on www.fundmonitors.com this week:

8IP Asia Pacific Partners Fund returned -1.36% during May and 18.58% for the last twelve months. The Fund's exposure in Australia and Japan detracted from performance as the small resource stock exposure continued to suffer and the Japanese financials experienced profit-taking.

The BlackRock Multi Opportunity Fund returned -0.16% during May and 8.98% since inception. The fund delivered a small negative performance in May with Global Equity Market Neutral, European equity long/short, and International Alpha Transport strategies adding value. Australian Equity Market Neutral, Global Macro, and Fixed Income Global Alpha strategies detracted.

AFM Prism Active Equity Fund returned 1.66% during May with the ASX 200 Accumulation Index down 4.5% over the same time. Of the five underlying funds, three had a positive month in May, and two had negative returns. One of the funds delivered a remarkable performance of 9.49% and this was the major contributor to the fund's performance.

The Bennelong Long Short Equity Fund returned 1.1% during May bringing it's since inception (Feb 2002) return to 21.03%. The Manager expects recent volatility to persist as markets and investors grapple with a potential change in ultra-loose monetary policy which has been in place for so long now.

You may also like to watch this most recent episode of Opalesque.TV, discussing Australian Hedge Fund Strategies, attractive liquidity terms and investors.

Now for something completely different, an unruly dog creates havoc in Richmond Park, sparking a host of parodys around the globe.

On that note I wish you a happy and healthy weekend.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

In this Opalesque.TV BACKSTAGE video, Chris discusses:

• The wide range of strategies offered by Australian hedge funds
• The strength of the Australian regulator
• Attractive liquidity terms and general outperformance of Aussie hedge funds
• Who invests into Australian hedge funds?
• High net-worth / self directed superannuation funds: the most attractive investor base for hedge funds

Chris Gosselin has been in the financial markets since 1986, initially in equities broking in Sydney and Melbourne prior to focussing on information distribution. He has been in the hedge fund sector since 2003, and established Australian Fund Monitors in 2006. Australian Fund Monitors provides a range of research services including due diligence, analytics and fund rankings, servicing both local and offshore investors. 

As Australia's financial year draws to a close, so to it would seem does the outlook for any extension of quantitative easing in the USA; the resources boom in Australia; the Aussie dollar at parity or above; and possibly China's growth trajectory.

Over the past two months the uncertainties created as a result of these will still result in a positive year for Australian equity markets, even if some of the gloss has been taken off the top as rationality returned.

For the record it looks as if the ASX 200 will record one of its better years in the 12 months to June, up nearly 18%, although the second half, since January will struggle to show a gain of 4%.

A comment from one of the fund managers we recently talked to focused on the degree of involvement that politicians have had in global markets over the past three or four years.

Politically it also ends one of the more turbulent years (or three) in Australian politics, although local politicians have had less of an impact on the market than their overseas counterparts.

Looking forward there are significant changes on the horizon for the financial services industry, most notably the introduction of the FOFA legislation relating to the provision of financial advice to retail investors. While it is often considered that absolute return funds and retail investors are, or should be, like oil and water, the reality is that approximately 50% of the funds in our database are open to investment by retail investors, and slightly more than that have minimum investments of less than $50,000 and daily liquidity.

Elsewhere we believe the absolute return industry is gaining considerable traction, while at the same time maturing. AIMA, or the Alternative Investment Management Association has recently indicated that its Australian arm, under the leadership of industry veteran Paul Chadwick is taking a more proactive and outward looking approach.  At the same time the US Based Hedge Fund Association or HFA, has recently established an Australian chapter and is being represented by Adriana Kostov.

The Hedge Fund Association, is a US founded, International not-for-profit industry trade and nonpartisan lobbying organisation devoted to advancing transparency, development and trust in alternative investments, and is made up of hedge funds, funds of funds, family offices, high net worth individuals and service providers.

There is no doubt that competition between the two organisations will benefit all industry participants whether they be service providers, fund managers or investors. For too long the industry has been seen as a collection of boutiques without a single voice, and raising its profile is a step in the right direction.

Performance and News Updates on www.fundmonitors.com this week:

Auscap Long Short Australian Equities Fund returned -4.05% during May and 10.51% for the last six months. This compares with the benchmark return of 0.24%. Average gross capital employed by the Fund was 162.3% long and 31.2% short. Average net exposure over the month was +131.1%. At the end of the month the Fund had 25 long positions and 14 short positions.

The Totus Alpha Fund returned 1.84% during May and one year rolling returns are 17.34%. Since inception the fund has averaged returns of +1.45% (net) during months in which the ASX was up and +1.63% (net) during months in which the ASX was down. The fund's short positions in second and third tier mining and mining services stocks continued to deliver strong returns during May while the (more) recently added domestic cyclical shorts also contributed nicely to performance.

BlackRock Australian Equity Market Neutral Fund returned -2.12% during May and 6.09% for the preceding twelve months. Fund performance was hurt by the rebound in small/mid cap resources which had been sold down heavily in April, by the outperformance of USD exposed stocks, and by several significant stock specific profit warnings.

The Pengana Australian Equities Market Neutral Fund returned -1.7% during May bringing its since inception (Sept 2008) return to 8.27% pa. Earnings Revisions was the best performing investment theme in the Fund's model followed by Momentum and Value, while Quality detracted from performance for the month.

AUI Wingate Global Equity Fund returned 8.95% over May and 23.81% over the preceding twelve months. Performance was supported by the weaker Australian dollar as the portfolio's assets are unhedged. Successful stock selection contributed to relative outperformance notwithstanding the Fund's lower than average equity weight.

Fund Reviews were also completed on Insync Global Titans Fund and BlackRock Australian Equity Market Neutral Fund.

Now for something completely different, this week one of Rowan Atkinson's characters visits the bank.

On that note I wish you a happy and healthy weekend and look forward to a prosperous new financial year starting on Monday.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook