GFC turns 10, Hedge Funds Rock turns 17!

10 years on from the collapse of Lehman Brothers, the trigger that fired a bullet that was to become known as the Global Financial Crisis, and there are a number of voices warning that whilst everything in the garden may seem rosy, there are worries that markets are heading for further turbulence.

As the recent AFM Insights article from Arminius Capital explains, the US equity market has risen by 350% from its March 2009 low, but the real growth has been in debt, thanks to central banks flooding the system with credit, and allowing eager corporate and individual borrowers to take advantage of impossibly low interest rates.

Other voices are spreading the same cautionary tale. At this week's Australian AIMA (Alternative Investment Management Association) conference, a number of respected voices, including Regal's Philip King, warned of the dangers of the valuations of some growth stocks which he fears will be unsustainable in due course. 

While King is warning of the danger, he is also looking forward to the opportunity - or opportunities - which will present themselves on the short side. Given the track record of Regal's various funds, which have provided twelve-month returns of between 28% and 74%, and annualised returns ranging from 13% to 35% over a long period which included the GFC, albeit with commensurate volatility, it would be well worth listening to King's voice of experience.

The AIMA conference was followed by last night's 17th annual Hedge Funds Rock event, which combined recognition of the best performing managers across eight categories, along with raising funds for well worth charities, including Redkite which supports the families of children with cancer - with the total raised over 17 years now well over $2 million. Like the industry itself, this event has evolved over the past 17 years from a bunch of managers letting their hair down at Sydney's legendary Basement, through to last night's excellent event for almost 500 held at the Westin's Ballroom.

The award for the individual contribution to the Australian hedge fund industry went to Bronte Capital's John Hempton. For those not aware, Hempton's skills have been particularly evident in uncovering dodgy, if not fraudulent, accounting, and shorting overvalued companies. One person who will not be impressed either by the industry's recognition of Hempton, or by his expertise on the short side, would be Harvey Norman's Gerry Harvey, who once again this week came out spitting chips about the level of short sales in his beloved company.

Without going into the rights or wrongs of short selling, Hedge Clippings' view is that the best way to avoid short sellers is to clean up one's balance sheet, have accurate and transparent accounts, and focus on managing the business at hand (and in Harvey's case that means retailing, not farming). Of course that doesn't cover the situation of short sellers of stocks that are considered vastly overvalued, but if anything they are helping to ensure that valuations don't become even further stretched.

BENNELONG TWENTY20 AUSTRALIAN EQUITIES FUND

Attached is our most recently updated Fund Review on the Bennelong Twenty20 Australian Equities Fund.

• The Bennelong Twenty20 Australian Equities Fund invests in ASX listed stocks, combining an indexed position in the Top 20 stocks with an actively managed portfolio of stocks outside the Top 20. Construction of the ex-top 20 portfolio is fundamental, bottom-up, core investment style, biased to quality stocks, with a structured risk management approach.

• Mark East, the Fund's Chief Investment Officer, and Keith Kwang, Director of Quantitative Research have over 50 years combined market experience. Bennelong Funds Management (BFM) provides the investment manager, Bennelong Australian Equity Partners (BAEP) with infrastructure, operational, compliance and distribution services.

For further details on the Fund, please do not hesitate to contact us.

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - August 2018 (pdf format)

BENNELONG LONG SHORT EQUITY FUND

Attached is our most recently updated Fund Review on the Bennelong Long Short Equity Fund.

• The Fund is a research driven, market and sector neutral, "pairs" trading strategy investing primarily in large-caps from the ASX/S&P100 Index, with over 15-years' track record and an annualised returns of over 16%.

• The consistent returns across the investment history indicate the Fund's ability to provide positive returns in volatile and negative markets and significantly outperform the broader market. The Fund's Sharpe Ratio and Sortino Ratio are 1.02 and 1.72 respectively.

For further details on the Fund, please do not hesitate to contact us.

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - August 2018 (pdf format)

Sometimes on a Friday Hedge Clippings wonders what on earth we're going to write about. Then you get days like today where there is plenty. I guess it's either a feast or famine.

So where to start? Well, it looks as if Donald Trump is going to be upping the ante by confirming his $200 billion trade wall (that was supposed to be "war", but I guess "wall" will do just as well) with China. It is yet to be determined whether this is going to develop from a significant skirmish into a full-blown battle, and also, depending on one's point of view, whether the damage will hit the Chinese or the American economy the most.

The current view is China the most, but the answer is quite possibly both, and of course, the rest of the world will suffer serious collateral damage. However, irrespective of one's view of Trump's rhetoric, it is unlikely to be empty as he tries to prevent what he sees as China's domination of, if not the world economy, at least that of most emerging markets. Depending on whether you are American or Chinese will no doubt determine which side of the fence you sit.

Overnight Trump received an unexpected vote of confidence, or reference if you like, from Kim Jong-un who is reportedly aiming at denuclearising North Korea before the end of the Donald's first term. China's President Xi Jinping may not be so easy.

Back home in Australia ASIC seems to have been encouraged by the Hayne Royal Commission, announcing legal action against NAB for charging customers fees for no service. Expect more of the same as ASIC moves from a policy of behind doors negotiation and penalties, through to putting perpetrators in court, even before the end of the HRC. The difficulties of getting an actual conviction however, and what the court may or may not decide as retribution for any proven wrongdoing, remain to be seen.

As predicted in last week's Hedge Clippings, two other big banks played catch up with the rate rise from Westpac, and adding a couple of bps for good measure, while the RBA kept interest rates on hold as expected on Tuesday, signalling that the economy was in good shape. By Wednesday it was evident just how good a shape the economy was in, with revised numbers lifting GDP by 3.4% over the year to June. There doesn't appear to be a negative cloud on the domestic economic horizon at the moment (unlike the political one) unless the slowdown in the housing market, which the RBA has been seeking for some time, accelerates further and overly damages consumer confidence.

Finally, there were warnings regarding the dangers of passive investing. We would have to declare a vested interest in this regard as we specialise in the actively managed fund sector. Whilst we can certainly see the benefits of passive investing as a way of reducing investment costs, it can distort valuations, particularly in rising markets, based on the premise of "a rising tide lifting all ships".

The risk of passive investing however comes as markets turn downwards, when index and passive funds will see indiscriminate outflows. Just as the rising tide lifts all ships, so too it lowers them when it falls. That's when actively managed and hedge funds come to the fore, (and thus justifying their fees) by protecting capital and hopefully without adding to the outflows.

While on the subject of performance, we frequently normally keep fund performance updates to a fairly dry commentary. However, the Bennelong Long Short Equity Management's (BLSEM) August performance of 10.59% (see report) was something special, even if the manager was at pains to point out that it should not be taken as normal. We can safely mention this fund as it is closed to new investors, but it is a terrific example of how a well-managed hedge fund can work. The fund has returned 16.77% annualised after all fees over 16 years since its inception in February 2002.

An important measure of a fund's risk is the Down Capture Ratio or DCR - in BLSEM's case of minus 201%. For those not familiar with the Down Capture Ratio, a DCR of 100% indicates that the fund falls in line with the market in negative months. A figure of less than 100% indicates that the fund falls less than the market. A negative number indicates that the fund rises when the market goes down. Negative Down Capture Ratios are rare but not unknown, and one of -201% is extraordinary, particularly over a period of 16 years. This was no flash in the pan!