From December brokers, superannuation firms and hedge funds will be required to report when they are borrowing stock, the RBA revealed yesterday.

Under the new disclosure rules brokers are required to report to the ASX when they are using stock borrowed under security lending agreements in trades. The quantities of stock borrowed daily will be published by the ASX. Investors who frequently lend stock will also be obliged to disclose their lending activities.

These rules were developed after an RBA-led investigation into the delayed settlement of trades across the market last January indicated stock lending was to blame. Along with the new short selling reporting rules revealed last year, the RBA is hoping these new regulations will increase transparency, thereby increasing confidence in the markets in volatile times.

The Governor of the Reserve Bank of Australia, Glenn Stevens, addressed the House of Representatives Standing Committee on Economics today and delivered an opening statement that was both sobering and relatively positive at the same time.

Citing the worst economic conditions in decades, and severe threats to the World's banking and financial system, he nonetheless indicated that Australia was relatively well placed after easing monetary policy by 400 basis points, and citing China's ongoing growth as a potential saviour.

For a full copy of the text of the speech, click here

Goldman Sachs JBWere's Multi-Strategy Fund was closed on February 2, after freezing applications and redemptions in late November. The Fund is a fund of hedge funds, which offers Australian and New Zealand investors exposure to a variety of underlying managers and strategies.

Liquidity has proven to be a problem for fund of hedge funds in recent times, particularly due to the slide in the Australian dollar and in cases where the fund offers monthly liquidity however the underlying funds only allow quarterly or longer redemptions. Several other fund of hedge funds, including the BT Global Return Fund, Select Gottex Market Neutral Fund, HFA's Diversified and Octane Funds, DWS Strategic Value Fund and the Credit Suisse/Tremont Index Strategies Fund were also forced to freeze redemptions in late 2008.

As widely expected the Reserve Bank of Australia (RBA) reduced official interest rates by a further 100 basis points to 3.25% as a response to the global economic crisis.

The full text of the Board's media release follows:

'At its meeting today, the Board decided to reduce the cash rate by a further 100 basis points, to 3.25 per cent, effective 4 February 2009.

There was a significant deterioration in world economic conditions late in 2008. The effects on household and business confidence of the financial turmoil following Lehman’s collapse, and continuing strains on major financial institutions, saw a significant downturn in demand around the world. As a result, the major advanced economies contracted sharply in the December quarter, as did a number of emerging market economies. The Chinese economy, though still growing, has slowed markedly. Global inflation, having reached high rates during the middle of 2008, is now declining.

Measures to stabilise financial systems have contributed to an improvement in the functioning of credit markets over the past couple of months. This, in conjunction with expansionary macroeconomic policy measures being taken around the world, should assist in promoting global recovery over time. But the near-term outlook for the global economy is the weakest for many years.

Economic conditions in Australia have also been affected, though less than in other advanced economies. Australia’s financial system remains in a strong condition and large interest rate reductions over recent months have been passed through in substantial measure to end borrowers. Nonetheless, the combination of last year’s financial turmoil, a severe global downturn and substantial falls in commodity prices has had a significant dampening effect on confidence, and therefore on prospects for growth in demand. Inflation has begun to moderate and, given recent developments, it is likely to continue to decline.

In these circumstances, the Board judged that a further sizable reduction in the cash rate was appropriate, to give further support to demand. In making its decision, the Board took into account the package of measures announced by the Government earlier today. The combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad.'

Australia's financial services regulator, ASIC, has extended the ban on covered short sales of financial stocks until March 6th, 2009. The ban, which was due to be lifted on 27th January, was extended due to renewed volatility in financial stocks in the US and Europe.

ASIC's decision will no doubt please some, and disappoint others, including those investors who have sold stock ahead of the expected lifting of the ban and in anticipation of further price weakness. However, the renewed volatility in bank and financial stock prices overseas has probably had more to do with additional and continuing bad news in the sector than the resumption of short selling.

In their statement released on 21 January, ASIC said:

'ASIC today said it would keep the ban on covered short selling of financial securities in place until Friday, 6 March 2009.

ASIC advised the market on 13 November 2008 that the current ban on covered short selling of financial securities (as defined in ASIC’s release of 13 November 2008) would remain in place until at least 27 January 2009.

This approach was consistent with many other jurisdictions, including the UK, where the Financial Services Authority (FSA) planned to lift its short selling ban on certain financial securities on 16 January 2009.

The FSA lifted its ban on 16 January 2009 and ASIC expected to then lift its ban, so as to be in line with the other major markets.

ASIC, however, noted the recent increase in volatility in financial stocks in overseas markets. ASIC is not at this stage in a position to assess if the resumption of short selling in the UK was coincidental or contributed to this volatility and if so, to what extent.

As many factors are at play in these overseas markets, ASIC needs time to examine these latest developments. ASIC will therefore, over the next few weeks, assess the markets more carefully to determine the role of short selling and aggressive or predatory practices and whether there are similar risks for Australia when the ban is lifted.

ASIC believes that in the context of the renewed volatility affecting banking stocks in many markets, including the UK and USA, this cautious approach is warranted. ASIC believes that any possible loss of market efficiency or price discovery as a result of this additional short period of review is therefore justified.

ASIC’s decision to extend the ban on covered short selling of financial securities is also in the context of a legislative framework that recognises short selling as a legitimate mechanism of price discovery and liquidity, subject to disclosure and subject to intervention by ASIC in exceptional cases.

ASIC’s intention is and remains to keep its intervention to an absolute minimum. ASIC will continue its consultations with relevant stakeholders and other regulators in Australia and overseas.

ASIC will keep the position under review, and might decide it has sufficient information to be able to lift the ban earlier than 6 March, and will make a decision for 6 March closer to that date.'

Australia's Sydney Morning Herald (SMH) has reported that the Westpac controlled BT Investment Management wrote to investors before Christmas advising they were freezing redemptions on its $1.2bn Global Return Fund.

The SMH article cites BT believing that "unstable market conditions ... assets cannot be realised at prices that would be obtained in a stable market."

Management of the Global Return Fund was apparently outsourced to Grosvenor Capital Management in Chicago who are claimed to manage US$23bn. Grosvenor had taken action to segregate a portion of the less liquid assets.... and as a result are not currently available to meet redemptions in the fund. However, Grosvenor itself has not suspended redemptions from its own master fund.

Australian based Fund of Funds HFA Asset Management has suspended redemptions from a number of its underlying funds including the HFA Diversified Investment Fund, and the HFA Octane and Octane Series 2 Fund, effective December 22nd.

Citing deteriorating liquidity in the underlying funds in which it invests, HFA also announced limited liquidity in their US based Lighthouse Diversified Fund, by establishing a special purpose vehicle (commonly referred to as a "side pocket") to hold and isolate the redemptions in illiquid investments until such time as they are liquidated.

HFA are not the first, and are unlikely to be the last Fund of Funds to halt or limit redemptions due to lack of liquidity in underlying funds. In October Everest Babcock and Brown announced that it would freeze redemptions in their Income Fund, and earlier this month Macquarie announced a halt to redemptions in their Equinox Series of funds. Prior to this there were wide ranging redemption freezes in many Australian based mortgage funds.

To date single manager Australian Funds have avoided freezing redemptions in spite of being subjected to significant and widespread redemptions from investors, particularly Fund of Funds, who in turn have been subjected to a wave of redemptions from their own investors. However, the redemptions to date are having a domino effect as investors redeem from otherwise well performing funds due to the lack of liquidity in others. The liquidity issues are also primarily based on the larger overseas managers, although the flow on effect has certainly reached Australian funds and their investors.

With the S&P500 and the ASX both down around 7%, and energy and commodities in disarray, it seems strange to be saying that November saw some improvement and signs of stability. With 70% of funds reporting to date, the average November return of Absolute Return funds in AFM’s database was minus 2.81%.

The debate in the media continues as to whether Absolute Return Funds as a whole should be reporting negative results, but a more careful analysis shows that strategy selection has determined investors’ returns in 2008.

Once again the best performing strategies were non-equity based (i.e. Global Macro, Commodities, Currencies and Managed Futures). Equity based strategies suffered but still on average outperformed the underlying equity benchmarks with the S&P/ASX200 Accumulation Index ending down 6.2% for the month, the S&P500 Total Return Index down 7.18%.

Click on the link below for the full report.

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.