Our CEO, Chris Gosselin, wrote this article last week for the EurekaReport.

When evaluating managed funds, "only performance is reality".

We see all sorts of claims regarding fund performances - both from the managers themselves, in some sections of the media, and in so called "independent" research reports - which try to suggest that a fund is performing well, or has gained a recommended or highly recommended rating in spite of the fact that they have lost investors' money.

There's an appropriate quote from the former head of ITT, Harold Geneen as follows: "words are words, and promises are promises, but only performance is reality".

With apologies to Mr. Geneen, but when it comes to managed funds, and hedge funds are no exception, "performance is the only reality".

In our opinion, neither a rating, a recommendation, nor the soothing words and promises in a fund's marketing material means anything if that fund has failed to perform.  Of course performance means different things to different people (as we've seen recently at the Olympics) but in the field of absolute return and hedge funds it is fair to say that investors should expect a positive return. 

According to the www.fundmonitors.com  database of absolute return and hedge funds, 43% of funds provided a positive 12 month performance to June 2012.  Although 80% of funds in the database outperformed the ASX200 it still leaves 37% of funds outperforming the ASX but failing to provide their investors with a positive return.   Well tried perhaps, but we suspect neither the fund manager nor their investors would be overly happy, and we doubt that Harold Geneen would have been impressed.

What he would have been impressed with however would have been those that provided a positive performance including the following list of the top 10 equity long/short hedge funds over 12 months to June, 2012:

An impressive list, and in these difficult times such performances were difficult to achieve to say the least.  However, as readers would understand, 12 months is not long enough to really gauge a fund manager's performance, and further examination reveals some telling trends.

In recent articles we have shown that various funds and strategies can produce significantly different performances in different market conditions.  What is interesting about the performance of funds in the 12 months to June 2012 is that those with a positive performance over the last 12 months also showed a capacity to perform over the longer term.

It is also fair to say that the strategies that performed in the volatile conditions of the past 12 months tended to be risk averse with low net market exposure, rather than the high conviction, concentrated portfolios that had provided often spectacular performance in previous years, but often with high volatility.

This suggests that the past 12 months have been tough, an opinion which is unlikely to have many readers disagreeing with.  But it also suggests that those funds able to navigate the tough markets of the past 12 months have the necessary skills and capacity to do so over the longer term. 

And some definite trends emerged, further consolidating the benefit of avoiding risk when seeking consistently positive returns over the longer term.

Further investigation showed however that performance over the past 12 months was as good a method as any of filtering risk averse managers and funds.  Only four funds with a positive 12 month performance failed to provide a positive 24 months, and of the remaining, only four fell at the three year hurdle.  Four years became a little harder, with six falling by the wayside, and over five years, a few more.

Finally 26 funds (across all strategies, investing in both equity and non equity type assets) with positive returns over one year also had positive annualised returns over past two, three, four and five years.

That would appear to be enough to really sort the wheat from the chaff, but even within this group of 26 there were some performance measures which still required refining, most notably the intra year drawdowns in 2008 at the height of the GFC.   With the market down over 50% from its peak in November 2007 we removed any fund with a drawdown of 20% or more, leaving just 17 funds remaining.

Finally we measured each fund's risk adjusted performance as measured by the Sharpe Ratio, arrived at by taking actual returns less the "risk free" cash rate, divided by volatility.  Ideally this should produce a number as close to one as possible, but we took the top ten to produce our list of "best funds".

No doubt there will be arguments from some that this methodology is imperfect, and we readily admit that there more ways than this to filter good funds from bad.  For instance, some investors may not be so concerned about volatility, preferring to just take a fund's long term annualised return as the true measure of performance, and of course what suits one investor's risk and return appetite may not suit another's.

The list below also excludes some newer managers who don't have a five year track record, but somewhere along the way a line has to be drawn.  If good enough they'll no doubt appear in these columns next year, or the year after. 

So stripping away the words and promises of the marketers, here are 12 funds which have provided positive returns over five years to June 2012, while having a drawdown of no more than 15% during that time.    Performances over 24 to 60 months are annualised:  Sorted alphabetically.

By any standard this is an impressive performance from each of the above funds, but to have provided investors with positive returns each year over five years during some of the most difficult and turbulent market conditions is a significant achievement.  The fact that they are all "hedge funds" should dispel the myth that they are risky and speculative, and in fact reinforces one of the common factors amongst all the funds on the list:  First and foremost they consider the risk of loss of capital as more important, or at least equally important as providing a positive return.

Remember, "only performance is reality".

Chris Gosselin

The Church of England's pension fund has given its blessing to some of the world's biggest hedge fund managers, putting its faith in an industry much maligned for poor returns in recent years, its annual report showed.

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Former Nomura Holdings Inc trader Jean-Noel Payer is preparing to launch a $250 million Asia-focused volatility hedge fund aiming to take advantage of price swings in Asian securities, in one of the biggest startups in the region this year.

Payer, 36, who was a managing director at Nomura and worked with trader Benjamin Fuchs at the bank, told Reuters that he was setting up Voltex Asia Capital Ltd in Hong Kong. His firm received regulatory clearance on Tuesday.

He declined to disclose the start-up capital but a source familiar with his plans said he had commitments worth $250 million in a managed account for investors in the United States.

This puts Voltex among the top launches in Asia so far this year, following $440 million raised by Alp Ercil, the former Asia head of Perry Capital, and $195 million gathered by former UBS Australia trader Gerard Satur for his MST Capital.

"We target to be fully operational and launch in September," Payer said in an interview, adding that 95 percent of the fund's assets will be invested in Asia.

The move comes as many proprietary desk traders leave banks in light of the Volcker rule that limits the extent to which banks can trade in financial markets with their own capital.

Payer, a French national who came to Hong Kong in 1999, joins the likes of Fuchs, former Goldman Sachs trader Morgan Sze, and former head of JPMorgan Chase equity derivatives group for Asia-Pacific William Lee in moving away from proprietary desks to start their own hedge funds in Asia.

New Asian hedge funds raised $2 billion in the first half of the year with an average launch size of about $63 million, a survey released last week by industry tracker AsiaHedge showed.

Some startups are attracting capital despite tough times for the $127 billion Asian hedge fund industry, which has seen net outflows in 2012 and more than 40 funds closing down, according to research firm Eurekahedge.

Payer's hedge fund will combine volatility arbitrage and macro strategies, and will trade equity, fixed income and forex.

Volatility -- or the fear gauge -- refers to the rate of change in the price of an asset. It increases when uncertainty grows. Macro hedge funds focus on major economic trends and events and put their money wherever they see value.

Payer, a sailing enthusiast, ran the volatility trading team for Fuchs, who has now started his own hedge fund, BFAM Partners, in Hong Kong with backing from Nomura.

Fuchs' team, which started trading in April 2009, produced a 48 percent return for that calendar year, followed by 20 percent in 2010. The return in 2011, when peers in the Eurekahedge Asia index lost an average 8.4 percent, was about 1 percent, according to a marketing document obtained by Reuters.

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All asset managers will have to return to investors in their funds any profits made from lending out securities in Europe under new rules that threaten to wipe out a lucrative source of revenues for some of the world's biggest investment firms.

The rules set by Europe's main market regulator aim to to ensure that fund investors gain the benefit from securities lending, a common practice across the fund management industry.

 With 66% of funds results in for June, there's a pretty good idication of the best funds for the past 12 months. 

Ueli Wick, a former Credit Suisse Group AG banker who in June began running his own Singapore hedge fund, says he isn't bothering to court investors right away. Instead, he wants to focus on performance.

"It's not that easy to go out with a good story and just raise money like that," said Wick, 41, who founded Baruna Asset Management Pte with $15 million of his own money and some from family and friends. "People just want to see more proof and tangible numbers because they've just been too disappointed with hedge funds and are extremely skeptical. To get big money, I need to deliver first."

Baruna Asset Management is among Asian startups opting out of the struggle to raise capital as investors gravitate toward established funds in a region where managers are underperforming global peers. Asian startups gathered $1.39 billion in the first five months of 2012, 51 percent less than the same period in 2011 and a 69 percent decline from five years ago, according to Eurekahedge Pte.

The returns-first strategy, by lowering costs and sharpening focus on performance, may help the latest batch of Asian managers avoid the fate of predecessors. Of the 317 Asia- focused hedge-fund startups since the beginning of 2009, about 74 percent have failed to boost assets "significantly" and 56 have been liquidated, according to Eurekahedge, a Singapore- based research firm.

'Very Challenging'

"It remains a very challenging fundraising environment for young and small managers," said Max Gottschalk, co-founder of Gottex Fund Management Holdings Ltd. (GFMN), which is based in Hong Kong, which allocates $7.6 billion to hedge funds. "By not taking in outside investors, the manager can remain focused on managing the fund and develop a track record without some of the infrastructure needed to attract investors and without the fund raising and client service distraction."

The fundraising drought may prompt managers to take more risks to post returns that will help lure investors, said Paul Smith, chief executive officer of Hong Kong-based asset manager and hedge-fund distributor Triple A Partners Ltd.

"The only way out of this impasse for a smaller manager is to swing for the fences and to try to post two years of back-to- back spectacular investment performance," said Smith. "This will get them noticed quicker. So in a perverse way, I expect this environment to heighten risk taking."

While the number of startups in the first five months of this year increased compared with the same period in 2011, their average size declined. Fifty-nine funds opened in Asia this year through May, averaging $23.5 million at the start, compared with 45 new funds averaging $63.1 million in 2011, according to Eurekahedge.

'Investment Opportunities'

In the U.S., 191 startups raised an average $42 million in the first five months of 2012, while new hedge funds in Europe totaled 105 with an average $36 million, Eurekahedge data showed.

"We do think that this is a great time to launch a hedge fund, given the current investment opportunities," said Wick. "Even though you can raise much less than what you could in a good market."

Wick, former director of ultra-high-net-worth-investment consulting group at Credit Suisse in Singapore, began running his Singapore dollar-based Baruna Global Macro Fund in June, he said. The fund, which will have capacity of S$500 million ($397 million), returned 0.3 percent in the first month of trading, Wick said.

'Uphill Battle'

True Partner Holding Ltd., founded by four former Hong Kong-based employees of Saen Options BV, decided to halt roadshows for about a year, said Chief Executive Officer Ralph van Put. Four months after its inception in July 2011, True Partner principals went on a trip to Switzerland in November to visit family offices and smaller banks and realized raising money for a small global volatility arbitrage fund was an "uphill battle," he said.

Before the four set up the Hong Kong-based hedge fund, they had generated a 70 percent return over two years trading their own capital after leaving Saen, an Amsterdam-based market-maker, in 2009, said van Put.

"We were always doing proprietary trading and never had any clients," said van Put. "So you can imagine for us raising capital is somewhat difficult, not being in the asset-management business for a long time."

True Partner began trading with $22 million from its partners and seed capital from Samena Asia Managers, which backs young hedge funds. True Partner's fund returned 16.5 percent from inception through June, said van Put. It has increased assets to $34 million with investments from wealthy individuals and plans to resume marketing trips in September, he said.

Athos Capital

Athos Capital Ltd., a Hong Kong-based manager of an Asia- Pacific event-driven fund that started trading in April, plans to focus mainly on building a track record of positive returns during its first year instead of "doing a broad marketing push," said a person familiar with the matter.

Athos is 35 percent-owned by Ascalon Capital Managers Ltd., an Australian hedge fund incubator backed by Westpac Banking Corp. (WBC) It has returned 2 percent since inception, the person said, asking not to be identified because the information is private. Matthew Moskey, Athos's chief investment officer, declined to comment.

Asset 'War'

Less than 6 percent of investors anticipate allocating to hedge funds with assets of less than $100 million this year, according to Deutsche Bank AG's annual alternative-investment survey released in February. Twenty-nine percent of all investors demand hedge funds have minimum track records of six months to three years before they would consider an investment, according to the survey, which polled 376 investors with $350 billion of hedge-fund assets.

"In the current war for assets it is important to differentiate -- if you can say you have a great team, story, infrastructure plus a say one year audited track record it will make it easier," said Mark Wightman, global head of alternatives strategy in Singapore at SunGard, a provider of trading systems for financial firms. "Most of these new guys are coming from prop desks, so some investors are nervous as to whether they can succeed without all the infrastructure they had around them."

Samena Asia Managers, a Hong Kong-based unit of Samena Capital Management Ltd., is trying to discourage the managers it provides startup capital to from taking expensive international marketing trips during their first year, said managing director Julius Wang.

"If you are just starting up, people are skeptical," Wang said. "Why would they give you money unless you've actually demonstrated you have performance?"

Salaries, Expenses

Salaries for fund marketers start at $100,000 per year plus about $50,000 for travel and expenses, and would be "a lot more" for someone competent, said Peter Douglas, principal of Singapore-based GFIA Pte, which advises investors seeking to allocate money to hedge funds.

Demand for Asian startups before the global financial crisis in 2008 was stronger, helping them raise money more quickly, said Samena's Wang. Between 2006 and 2007, new hedge funds in the region were often seen going on two- to three-week marketing trips to the U.S. and Europe before trading even began, he said.

"Difficulty in fundraising has certainly been a global issue, especially over the last twelve months," said Farhan Mumtaz, a hedge fund analyst at Eurekahedge in Singapore. "However, Asian and European hedge funds suffer more from this than North American funds. The last time we saw some healthy allocation activity was in early 2011, and at that time most of the capital flowed to North American funds."

'Make Sense'

In 2007, 89 funds started in the first five months of the year in Asia, raising an average $50.9 million, more than double the amount for 2012, according to Eurekahedge.

"The current environment is not going to ease any time soon," said Triple A's Smith. "If you estimated that it would take three years to build a fund pre-2007, now it will take you five years."

For Shuhei Komatsu, a former equity-derivatives trader at Merrill Lynch & Co. in Tokyo, joining a proprietary-trading house to build his track record before setting up his own fund made more sense.

Komatsu, 29, began working for Singapore-based Phi Management Pte after leaving MAM Pte, a Japan-focused hedge fund also based in Singapore in March. Komatsu currently manages about $20 million investing in derivative markets in Japan, including credit default swaps and equity derivatives, he said. The fund has returned about 15 percent since inception in March through the end of June, Komatsu said.

The Sidelines

"Looking at how so many people have failed to just go out there on their own and struggling to raise money, joining a prop-trading firm and building my track record made more sense," Komatsu said. "This would allow me to focus on trading and raise decent-sized money once I do decide to go solo."

Ryo Ishiyama, a former Deutsche Securities Inc. banker, says he is starting a hedge fund investing in global commodities futures in Tokyo, and is in no rush to raise funds. Japanese hedge funds have faced increased scrutiny following the fallout of AIJ Investment Advisors Co., which allegedly lost more than $1 billion with hedge-fund strategies.

"As we've seen in AIJ's case, you don't run a fund for the sake of raising more money -- you run a fund to make returns," said Ishiyama. "For now, I want to focus on managing private money, which is mostly my own money, to build my track record."

Tough Times

Ishiyama said he will not start raising money for the first year or two.

"It really is tough out there given the global economy; people are sitting on the sidelines," said Phil Tye, co-founder and managing director of DragonBack Capital Ltd., which provides support such as accounting, independent risk management and compliance services to hedge funds on its platform. "Marketing takes time in this environment."

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British hedge fund manager Man Group on Tuesday revealed a first-half net loss of $164 million (135 million euros), blaming "turbulent" financial markets and economic uncertainty.

The loss after tax, suffered in the six months to the end of June (see interim report), compared with a net profit of $70 million in the first half of 2011, Man Group said in a statement.

Total funds under management dived almost ten percent to $52.7 billion at the end of June from $58.4 billion at the end of December.

"Against a turbulent market and economic background, Man's funds under management have declined," said chief executive Peter Clarke.

"The result is a marked decline in underlying profitability."

Clarke unveiled another round of cost-cutting measures to save the group $100 million over the next 18 months and steer it back to profit.

John Paulson, one of the world's most closely watched hedge fund managers, told clients on Monday that he sees a 50 percent chance the euro zone will break up, according to an investor.

Paulson underscored his negative sentiment on Europe in a regularly scheduled call with investors.

The investor asked not to be named since Paulson & Co's funds are private.

A Paulson spokesman declined to comment.

Paulson earned billions of dollars betting against the overheated housing market in 2007, but he ranks as one of the year's worst performing hedge fund managers this year.

So far in 2012, his bets against Europe have hurt some of his portfolios. His Advantage Plus fund lost 18 percent during the first six months of the year after losing more than 50 percent last year, investors said.

Paulson is known for making big bets and sticking with them, and he has long suggested that European policymakers' efforts to solve the region's debt crisis will fall short.

 Paulson and Co Inc. is on track to survive a reversal of fortune that sources say very few other hedge fund managers could withstand.

Assets declined $17 billion " 44.9%" to $21 billion as of June 30, down from a peak of $38.1 billion in February 2011. Much of the loss is the result of poor performance over the past year of the New York-based company's flagship Advantage event-driven arbitrage strategy, although there have been modest investor redemptions, sources said.

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