Potential is one thing, reality is a greater challenge.

A recent research report by ANZ Bank [entitled "Caged Tiger: the Transformation of the Asian Financial System"] forecast that Asia's share of the global economy will move from 25% currently to 35% in 2030, and then to 50% by 2050.

ANZ's report noted that with the exception of Japan and the newly industrialised economies, Asia's rapid industrialisation of the past 2 decades has not been matched by an extensive development of its financial system. Many Asian countries have relatively closed and highly regulated financial systems, with a dominant banking sector and heavily managed exchange rates.

But in order to move to the next stage of development the financial systems of many Asian economies must be reformed, opened and become less regulated.

The development of the financial system is one part of what is need to move these economies through middle income levels, with other factors including other economic reforms and improved legal structures.

Policy responses to the Asian Crisis in 1997 led to the situation whereby countries built up large foreign exchange reserves, with this surplus recycled back into the international system through the purchase of government bonds. However as these countries liberalise their financial systems they will play a much bigger role in allocating Asian savings to a far broader set of markets and investments.

ANZ modelling estimated that Asian bond markets will grow seven times over the next 15 years, and the capitalisation of equity markets will move from $9 trillion to almost $55 trillion by 2030.

Turning to Australia, in 2010 around 2.5% of China's total foreign investment was invested in Australia. Even if that percentage remains unchanged, the total level of Chinese investment into Australia could reach over A$200 billion, or according to ANZ's estimate, about 15% of Australia's forecast GDP by 2030.

Where are we headed with all this?

In the financial services and fund management sector, currently less than 20% of Australia's funds under management is sourced from offshore. This will continue to grow as Asia's transformation progresses, with Sydney likely to be the largest beneficiary. However it is not clear if the benefits to all capital market activities will flow equally, with debt, trade finance and insurance likely to face competition from other Asian financial centres such as Singapore and Hong Kong, and no doubt Shanghai at some stage in the future.

The point is that in spite of the opportunities facing Australia's banking and financial sector, it must be remembered that opportunity and reality are often significantly different. Australia has a wealth of educated talent in place, with plenty more experienced expats keen to return home, a regulatory system that is generally first class, and passably sound infrastructure (NBNCo notwithstanding).

The key will be the Government's role, and those who know Hedge Clipping's views will not be surprised that this is where potential and reality can come unstuck. The government - of whichever persuasion - needs to put the correct tax, structural and regulatory policies in place to ensure the framework is created to allow Australia to compete in the Asian, and global financial marketplace.

In the next week or so David Murray's Financial System Inquiry (FSI) report is due to be released. We can only hope that this government grasps that opportunity, and not waste it in the way the previous Henry Tax Review, or Mark Johnson's 2009 report were squandered.

Specific results received this week include the following PERFORMANCE UPDATES:

The Auscap Long Short Australian Equities Fund recorded a return of 2.25% in October with the annual return 29.93% and a volatility of 6.95%.

Alpha Beta Asian Fund returned -0.51% during October with annualised performance since inception of 7.58% with volatility of 5.24%.

The Aurora Fortitude Absolute Return Fund returned -0.29% during October bringing annualised performance since inception to 7.55%.

Allard Investment Fund recorded a performance of 0.60% during October bringing the annual return to 13.30%.

FUND REVIEWS released this week, all with the potential for earning CPD points:

Microequities Deep Value Microcap Fund; Bennelong Kardinia Absolute Return Fund; Supervised High Yield Fund

Best wishes for a happy and healthy weekend,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

In this week's Clippings: FoFA, the Senate circus, and budget deficits as far as the eye can see.

Irrespective of the rights or wrongs of either side's opinions and arguments over the Government's Future of Financial Advice (FoFA) reforms, this week's about-face in the Senate seems to confirm a number of thoughts:

Firstly that the government has done a pretty average job of selling their proposed changes to the original legislation. Secondly, the Senate, which had seemed to be much like a circus looking for some new clowns, appeared to have found them; and thirdly that the level of uncertainty created as a result is simply unacceptable.

As far as the government's sales job goes this is hardly surprising given the success of their other PR and communication efforts over the past six months. What is surprising is that many commentators still seem to think that commissions for dodgy financial advice were still on the table. As far as we could see the new legislation made it absolutely clear that this was not the case.

That's not to say that everything in the government's changes were perfect, but it was pretty plain that financial advisers had to act in their client's best interests, and that conflicted remuneration had been banned. However given the various misdemeanours in the financial services industry, large and small, over the past few years most minds had a really been made up, irrespective of the facts.

As for the Senate, it is somewhat ironic that Clive Palmer, who has been known to do the odd ungainly reverse somersault in the past, found himself subject to some of his own behaviour.

What will be interesting will be to see what compromises are made between now and June next year, because undoubtedly compromise will be required. But the really important part is the confusion created both within the industry, and presumably in the minds of the average investor, the very people who the legislation is designed to protect. Uncertainty benefits nobody.

Changing subjects, Hedge Clippings attended the Ernst & Young (EY) Global Hedge Fund Symposium this week for a presentation on the findings of their 2014 Hedge Fund and Investor Survey. Apart from a presentation on the results of the survey, which were of significant interest to the industry, there was an excellent keynote speech made by John Daley, the CEO of the Grattan Institute.

This was fascinating stuff, and entertainingly presented, even if the overall impression was that State and Federal budget deficits are likely to remain a serious problem for the foreseeable future irrespective of which political party is in power, and in spite of their rhetoric about fixing the problem.

The bottom line seem to be that in order to fix the problem issues such as the taxation of superannuation, GST, and negative gearing all need to be raised as potential solutions. With all of these there is likely to be significant pain not only for the current beneficiaries, but also for the politicians who try to implement them.

Specific results received this week include the following PERFORMANCE UPDATES:

The Paragon Fund returned -2.50% (ASX 200 Accum 4.43%) during October with annual returns at 23.80% (Index 6.39%) with a volatility 14.39% (Index 10.33%).

Totus Alpha Fund returned 0.87% during October and 15.65% over the prior 12 months with a volatility 8.94%.

The Avenir Value Fund returned -1.92% during October with annual performance of 18.68% and volatility of 9.00%.

Bennelong Kardinia Absolute Return Fund returned 1.22% during October and 4.31% over the previous 12 months with a volatility of 4.02%.

The Laminar Credit Opportunities Fund returned 0.51% in October with the 12 month return coming in at 9.28% with a volatility of 0.62%.

FUND REVIEWS released this week, all with the potential for earning CPD points:

Morphic Global Opportunities Fund; Monash Absolute Investment Fund; Bennelong Alpha 200 Fund

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

In this week's clippings: Not the G20, ASX top 20 concentration, Bank Valuations, the Property Market, and a new Fund in Focus video interview.

We'll leave any comment on the G20 well alone this week (apart from mentioning that we won't go there, either physically or metaphorically) firstly because it hasn't happened yet, and secondly because it has little to do with absolute return. Unless we could find an analogy with Tony "Shirt Front" Abbott's comments on Vladimir Putin and things making an absolute return bite you.

But we will spare you that.

Instead we'll draw on more words of wisdom from Optimal Australia's CEO George Colman who noted in his October performance report that the ASX top 20 index now represents 68% of the ASX200, compared the with 55% just prior to the 2007 market peak. Within that banks are now 31% of the ASX 200 index and the financial sector overall represent 47% - an all-time high.

Optimal's view is that investors in the Australian stock-market are assuming concentration risk of unprecedented levels, and that this skew in index concentration typically occurs at market extremes. However his view also is that he should save his breath, as YAAP, or yield at any price, continues to push these stocks up irrespective of the risk.

Other factors also highlight that bank prices possibly represent an "as good as it gets" scenario at current levels irrespective of the attractiveness of their yields. What was interesting in the recent round of bank results was that two thirds of their growth in earnings came from reductions in bad and doubtful debts, to record low levels of just 0.15% of gross loans.

As we said, it might look as if bank prices are as good as they get, so maybe Gail Kelly's departure from the top job at Westpac is smart indeed.

Bank prices are obviously closely tied into the current property market, and we took the opportunity of bouncing this off a well respected and trusted developer who knows much more about these things than we do. His view was that whilst the market is undoubtedly buoyant he thinks Armageddon is unlikely, rather that there are more likely to be long periods of low growth than the doomsday outlook of a property crash.

His logic was that affordability significantly drives property prices, and this in turn is driven by two key factors, namely unemployment and interest rates. Provided the former remains at reasonable levels, homeowners and borrowers will go to extraordinary lengths to maintain ownership of their home.

It's not only the banks that are enjoying the current property boom, with real estate agents, whose commission rates don't seem to have been trimmed in spite of the significant increase in prices, also enjoying the flow. State and local governments must be loving it too, with our favoured developer estimating that on a 20 unit block of two-bedroom apartments in Brisbane he is paying a total of well over $1 million in stamp duty, fees and taxes, and net GST to governments of various hues, on top of which the buyers also have to pay stamp duty.

Elsewhere this week we interviewed Jack Lowenstein from the Morphic Global Opportunities Fund, who gave an interesting overview of the fund's performance in October's global markets, which he described as the most difficult environment he had experienced since launching the fund two and a half years ago. You can view the video by selecting the image below, or the Fund's profile and the AFM Fund Review are here.

UPCOMING EVENTS:

25-27 March 2015 Digital Marketing for Banking and Financial Services Summit.

Specific results received this last fortnight include the following PERFORMANCE UPDATES:

Morphic Global Opportunities Fund returned 1.12% during October bringing the annual return to 15.62% with a volatility of 8.62%.

The Bennelong Alpha 200 Fund returned -2.49% during October with a net exposure of 1.2%.

Optimal Australia Absolute Trust returned -0.71% in October with annual returns at 5.42%, with a volatility of 2.08%.

The Cor Capital Fund returned -0.13% during October bringing the annual return to 1.72% with a volatility of 3.43%.

Best wishes for a happy and healthy weekend,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

The Choice: Tip Top Returns, or Capital Protection?

For a while it looked as if October's equity market performance was set to continue September's fall of over 5%, but a "V" shaped recovery mid month saw markets bounce back into positive territory, no doubt to the relief of most Fund Managers and their investors, particularly those in the long only category.

In Australia that saw the ASX200 Accumulation Index rise 4.43%, recouping some, if not all of September's 5.38% fall, while the US market, which hadn't suffered as much in September (for example the S&P500 had only fallen 1.4%) rose 2.44%, although broader global indices such as the MSCI All Country Index only managed a positive return of 0.25% in A$ terms.

Meanwhile, at this stage it is too early to tell how Australian absolute return funds fared in October with only a handful of results to hand. However looking back at September most earned their keep, with the average avoiding almost all of the market's fall, by posting an average return of -0.17%. Within that average the usual wide spread of returns was evident, with the best up 7.6%, and the worst down -13%.

On a year to date basis the average equity based fund had returned 4.97% to the end of September, outperforming the ASX200 Accumulation Index which had returned 2.42%, a far cry from the buoyant returns of 2012 and 2013. Over the past 12 months the same pattern emerged, with equity based funds up 10.8% vs the Index at 5.93%, and with 75% of all funds outperforming the market.

Often criticised for being risky, this puts hedge funds' performance in unmistakable perspective: Absolute return funds (on average) provide better risk adjusted returns than the underlying markets, albeit that in particularly strong periods they may lag them. As capital protection takes precedence over performance in most investors' minds this makes a good case for both the funds, and the industry as a whole.

However, not all funds are alike, so make sure you select the right fund!

UPCOMING EVENTS:

Don't miss out! Thursday 13 November in Sydney Best Cellars Night of Global Investment Themes.
Presented by Insync Funds Management, enjoy an evening presentation on some of the powerful global investment themes that will help to build your wealth offshore, together with a tasting of some truly interesting wines from all corners of the world.

25-27 March 2015 Digital Marketing for Banking and Financial Services Summit.

Specific results received this last fortnight include the following PERFORMANCE UPDATES:

The Allard Investment Fund returned 3.20% in September, ahead of the benchmark MSCI Asia Pacific ex Japan (A$) at -1.0%, with 12.96% annual return.

Microequities Deep Value Microcap Fund returned 1.66% during October as equity markets rebounded, with 12 month performance at 16.37% and a volatility of 7.41%.

The Monash Absolute Investment Fund returned -0.3% in October with 12 month performance at 4.83% with a volatility of 8.02%.

CPD points are available for all FUND REVIEWS released this week including:

Insync Global Titans Fund; Totus Alpha Fund; Bennelong Long Short Equity Fund; Nanuk Global Alpha Fund

Best wishes for a happy and healthy weekend,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

The great QE policy experiment ended overnight, (or at least QE3 ended) with the sky failing to fall in. In fact far from tanking, the market took the well telegraphed end of taper in its stride, with the S&P500 up 0.6%. Whether this was a case of relief that "nothing" happened or not will remain to be seen, but in reality it is hardly likely that the FED will start to tighten interest rates for at least six months.

As far as economic experiments go QE1, 2 and 3, along with the Taper have been pretty extraordinary. Like them or loath them, the US economy, particularly employment, has managed to pick itself up off the floor having been knocked there by a combination of lax (or minimal) regulation, some financial wizardry, and plenty of good old fashioned greed.

Rising interest rates now remain the big test, not only to the economy, but also to the markets. All the economic indicators suggest the US economy will be able to manage the orderly raising of rates reasonably well. Markets may well be a different matter if there's a stampede out of equities, but the question is, where to?

Any increase in rates will see falling bond prices, particularly at the short end. Over time higher bond yields will prove attractive, but coming off such a low base this will certainly take time. Volatility, or at least the fear of it, would appear to be the biggest risk to equity prices while there are so few alternatives other than cash.

Assuming the FED can manage an orderly increase in rates (sufficient to avoid spooking the equity market) then inflation might be the great unknown risk. However with the recent declines in energy prices, and the strengthening US dollar, this would seem unlikely also.

The problem is that risk always appears when least expected, and often from the least expected direction. (Think 9/11).

That still leaves plenty of opportunity for China, Europe, emerging markets and geopolitical factors to play their part.

And on that note, have a happy and relaxing, worry free week-end.

UPCOMING EVENTS:

Don't miss out! Thursday 13 November in Sydney Best Cellars Night of Global Investment Themes.
Presented by Insync Funds Management, enjoy an evening presentation on some of the powerful global investment themes that will help to build your wealth offshore, together with a tasting of some truly interesting wines from all corners of the world.

25-27 March 2015 Digital Marketing for Banking and Financial Services Summit.

Specific results received this last fortnight include the following PERFORMANCE UPDATES:

In a difficult month for equities the Insync Global Titans Fund returned 3.81%, bringing it's 12 month return to 13.86% with volatility of 8.09%.

The KIS Asia Long Short Fund returned -0.08% during September and 8.21% for the prior year with a volatility of 2.73%.

Bennelong Long Short Equity Fund returned -3.59% in September, a weak month for domestic equities (ASX 200 Accum Index -5.38%).

With a volatility of 0.57%, Laminar Credit Opportunities Fund returned 0.84% during September and 9.54% for the prior year (compared with the RBA Cash Rate of 2.50%).

The Cor Capital Fund's diversification was seen in September when the Fund fell 1.03% compared with the ASX 200 Accum Index which fell 5.38%.

CPD points are available for all FUND REVIEWS released this week including:

Bennelong Alpha 200 Fund; Alpha Beta Asian Fund

This week's Now For Something Completely Different... Why didn't the skeleton go to see a scary movie? He didn't have the guts.

Best wishes for a happy halloween and healthy weekend,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

In what was an interesting week, hedge clippings met with Steve Hall from Brookvine, a Sydney-based group who specialise in the distribution of alternative and private equity type funds to family offices (FO's) and high net worth (HNW) investors. Steve was good enough to provide some insights gleaned from a recent discussion that he organised with a group of experienced Chief Investment Officers and advisers to high net worth and family offices in Australia.

While not all recipients of hedge clippings necessarily fall into this category, much of what was discussed, and the resulting report that Brookvine produced has significant relevance to self-directed investors. One of the major aspects of the discussion was the objective of encouraging fresh investment thinking, particularly with a view that much of what is known and used in Australia depends on the theory, data, practice, experience and characteristics of large institutional US investors.

It was therefore relevant to question whether this US influence is necessarily relevant in an Australian environment. Whilst much of it is, and there is much to learn from the US, it seems there are specific requirements of HNW/FO's in Australia that are relevant in a local context. In particular the question was asked what investment advantages do Australian HNW/FO's have over larger institutions, whether it be here or offshore. Amongst other things:

1. Overall it appeared there was a broad endorsement for alternative investments, with most participants favouring active management supported by a strong belief in their ability to identify and access top tier managers;
2. Equally the group whilst being very cost conscious, focussed more on net of fees returns, rather than a blind (could we call it an obsessive) opinion approach by some local institutions that fees were more important than performance;
3. When it came to risk, the loss of capital dominated the opinions of local investors, broadly in line with the approach of most local managers.

Brookvine have kindly allowed us to upload the full report, entitled "Whiteboarding 1.0 ... The Report", which can be found here.

Specific results received this last fortnight include the following PERFORMANCE UPDATES:

Alpha Beta Asian Fund returned -0.70% during September, a difficult month in which global equities fell 2.9%, with an annual return of 7.07% and a volatility of 3.99%.

The Paragon Fund returned 0.30% in September as compared to the ASX 200 Acc Index which fell 5.38% and the twelve month return was 33.18% (Index 5.93%).

Auscap Long Short Australian Equities Fund delivered -2.09% in weak month for equities, 34.01% for the year with volatility of 7.61%.

The Totus Alpha Fund returned 1.02% bringing the annual performance to 30.85%.

Nanuk Global Alpha Fund returned -1.69% in September, with the Fund's twelve month return at 8.86%.

The Aurora Fortitude Absolute Return Fund returned -0.07% with a volatility of 0.98%.

CPD points are available for all FUND REVIEWS released this week including:

Monash Absolute Return Fund; Bennelong Kardinia Absolute Return Fund; Morphic Global Opportunities Fund; Supervised High Yield Fund

UPCOMING EVENTS:

5-6 November, Grace Hotel, Sydney. Alternative Investments Conference - Investigating the rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.

Thursday 13 November in Sydney Best Cellars Night of Global Investment Themes. Presented by Insync Funds Management, enjoy an evening presentation on some of the powerful global investment themes that will help to build your wealth offshore, together with a tasting of some truly interesting wines from all corners of the world.

This week's Now For Something Completely Different... I'm sure many of you have seen this clip before, it's a feel good moment. All the best to Nick and his beautiful bride Courtney this weekend, and forevermore.

Best wishes for a happy and healthy weekend,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

Volatility Reigns

The volatility that has been threatening markets for the past 12 months has finally taken effect, but even so the lifeline that central banks in both the US and Europe have thrown the financial system over the past few years still seems to be distorting how markets are reacting.

In part this could be a result of comments in some quarters in the US that there should be a pause in the QE taper. Looking at the trading on the S&P 500 over the past few days shows an extraordinary level of intraday volatility, with Wednesday probably the prime example when the market fell from 16,200 to below 15,900 in a matter of hours, only to immediately bounce just as sharply back to where it had come from (almost).

Bond markets have been equally volatile. There certainly seems to have been plenty to be concerned about over the past six months, and the surprise to many has been that the markets have not given way earlier. This undoubtedly has been due to central banks on both sides of the Atlantic distorting "normal" market action, and one can only wonder how much of the intraday activity noted above has also been central bank related.

In the face of all this absolute return fund managers tend to come into their own. This was certainly the case in September for Australian fund managers. Against a fall of 5.38% by the ASX 200 Accumulation Index, the average of all funds' September returns to date is -0.22%. Separating equity-based hedge funds makes some, but little difference, with their average return -0.43%, effectively an outperformance of 5%. Most importantly they are, by and large, protecting their investors' capital.

Obviously it hasn't all been plain sailing, and those funds with US dollar exposure have benefited accordingly, and no doubt improved the averages. Also benefiting the absolute return sector is that many funds have been increasing their cash allocation, while most also been reducing their net exposure over the past six months.

While there are various commentators urging investors to treat this as a great buying opportunity, it would seem to us that caution in the current environment is a more prudent strategy.

Specific results received this last fortnight include the following PERFORMANCE UPDATES:

Supervised High Yield Fund returned 0.54% during August and 6.95% for the year (RBA Cash Rate average 2.5%) with a volatility of 0.70%.

During August, the Nanuk Global Alpha Fund returned 0.52% and 16.39% for the prior year with a volatility of 8.98%.

The Monash Absolute Investment Fund returned -4.30% during September, a very weak month for domestic equities, which fell 5.4%. The Fund's annual return was 8.27%.

Still in it's first year of operation, the Bennelong Alpha 200 Fund returned 0.56% during September.

Optimal Australia Absolute Trust returned 0.64% during September, a month in which the ASX 200 fell -5.38%. Optimal's 12 month return is 6.51%.

The Morphic Global Opportunities Fund returned 3.20% in September and 17.93% for the prior 12 months with a volatility of 8.39%.

In a weak month for domestic equities the Microequities Deep Value Microcap Fund returned -2.59% bringing 12 month performance to 16.31% with volatility of 7.40%.

Bennelong Kardinia Absolute Return Fund returned -0.31% during September, while ASX 200 Acc stocks fell 5.38%, bringing annual performance to 5.29%.

CPD points are available for allFUND REVIEWS released this week including:

Supervised High Yield Fund; Totus Alpha Fund; Morphic Global Opportunities Fund; Aurora Fortitude Absolute Return Fund; Optimal Australia Absolute Trust; Microequities Deep Value Microcap Fund

UPCOMING EVENTS:

21-22 Octoberin Sydney Post-Retirement Australia 2014 conference. Comprehensive two day forum for high profile cross industry participants to provide updates, insights and ongoing discussion into the key issues central to achieving optimal financial outcomes.

Next Friday 24 Octoberin Sydney Financial and Media Markets Charity Regatta Day out of Middle Harbour Yacht Club. Promises to be a fantastic day.

5-6 November, Grace Hotel, Sydney. Alternative Investments Conference - Investigating the rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.

This week's Now For Something Completely Different...Bill Bailey, who is performing in Sydney tonight, teams up with Robin Williams keeping it Royal.

Best wishes for a happy and healthy weekend,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

The volatility that had been threatening Australian equities for the past few months, but which had stubbornly refused to be reflected in the market, hit home severely in September with the ASX 200 Accumulation Index down -5.4%.

To put that into context, it's the worst performance by the Australian market since May 2012 (-6.64%) and the first time since August 2012 that the rolling 12 month return (+5.93%) has dipped into single figures. On a year-to-date basis the accumulated return of the ASX 200 is now just 2.42%.

At the same time, and undoubtedly connected, the Aussie dollar also took a bath (or at least a cold shower) as a combination of poor commodity prices, particularly iron ore as China's buying slowed, a resurgence in the US dollar on the back of the end of QE, and the threat of impending increases in US interest rates saw capital outflow across the Pacific.

The funds in the best position are likely to be those with offshore and US dollar exposure in particular, provided they had limited currency hedging in place.

None of this was particularly surprising, and in fact to many fund managers it was somewhat inevitable. Investor's incessant chase for yield, particularly in the banking sector, had seen valuations stretched, with more than a few managers struggling to outperform while staying true to type. While it is early days yet for accurate indications for September returns, those that we have seen indicate the manager's ability to outperform in falling markets.

For hedge funds in particular the past two years have not been the easiest of times, and whilst none will particularly like the falling market, the increase in volatility, and their general ability to protect capital will reinforce their value to investors.

Specific results received this week include the following PERFORMANCE UPDATES:

The Allard Investment Fund (Asian equity) returned 0.40% during August and 9.35% over the preceding year with a volatility of 5.46%.

During August, the Morphic Global Opportunities Fund delivered a return of 1.28% and 14.57% over the previous 12 months with a volatility of 8.23%.

CPD points are available for all FUND REVIEWS released this week including:

Insync Global Titans Fund; Bennelong Kardinia Absolute Return Fund; 

UPCOMING EVENTS:

15-17 October Grace Hotel, Sydney - Investment Performance Measurement, Attribution & Risk Management Forum will have leading experts sharing up-to-date, cutting edge ideas and insight on frontiers of recent developments in performance measurement.

21-22 October in Sydney Post-Retirement Australia 2014 conference. Comprehensive two day forum for high profile cross industry participants to provide updates, insights and ongoing discussion into the key issues central to achieving optimal financial outcomes.

Friday 24 October in Sydney Financial and Media Markets Charity Regatta Day out of Middle Harbour Yacht Club. Promises to be a fantastic day.

5-6 November, Grace Hotel, Sydney. Alternative Investments Conference - Investigating the rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.

This week's Now For Something Completely Different... with a long weekend approaching, double demerit points are in force, so whatever you do, drive safely or take alternative forms of transport. This clip is quite sobering, but should be watched by everyone to remind us that we aren't invincible. 

Best wishes for a happy and healthy weekend,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

And now for something completely different to start with. Hedge Clippings on a Monday.

The past couple of weeks have seen two "exit" news items out of the USA which have caught the attention of the absolute return sector. Firstly CalPERS, (California Public Employees' Retirement System) a significant and longstanding hedge fund investor, decided to exit their entire $4 billion exposure to the sector, followed last week by the news that investment manager Bill Gross, frequently cited as one of the industry's gurus and a founder and 40 year veteran of PIMCO, with a total of $2 trillion in FUM had quit to join the much smaller Janus Capital Group.

As this article from Forbes explains, while CalPERS' $4 billion seems a significant chunk of capital, it represented only a small portion of the $300 billion they manage in total. If one used the Australian Future Fund's hedge fund exposure of 16% as an example, CalPERS would have to increase their allocations by a massive $44 billion to match it.

CalPERS cited fees, performance and complexity as being amongst the reasons for their exit from hedge funds, and we have no doubt all are a significant factor. But with only just over 1% of their assets allocated to any one sector, it made it difficult (and expensive) to make a significant difference to their overall performance, which incidentally hadn't been too good.

The problem comes down to the trade-off between size and performance. It has long been understood that while the majority of institutional investors' capital flows into the largest 10% of funds, it is equally accepted that this is not where the best returns are to be found.

Take Bill Gross' fund at PIMCO for example. Over the past 15 years he provided returns in the top 12% of his peers, but over the past 12 months he has lagged to be in the bottom 20%. At his new home, Janus Capital Group, he will reportedly have just $13 million in FUM, and be in a significantly better position to outperform once again.

Anecdotal evidence suggests that there were other issues in his exit from Pimco, including differences of opinion over management. While his new fund won't have the luxury of the management fees he was earning, he will have the flexibility and freedom to return to being a nimble investor, one of the key drivers of small to medium funds' out performance of their larger competitors.

It seems size isn't just important, it just matters.

Specific results received this week include the following PERFORMANCEUPDATES:

KIS Asia Long Short Fund returned -0.1% during August and 9.57% over the prior twelve months with a low volatility of 2.65%.

Results for August show the Laminar Credit Opportunities Fund returned 0.53% for a 12 month return of 9.64% (RBA Cash Rate average 2.50%) with a volatility of 0.59%.

The Auscap Long Short Australian Equities Fund returned 5.24% during August, a strong out-performance of the equity market return of 0.62%, with a 12 month performance of 44.87% and a volatility of 6.55%.

Pengana Absolute Return Asia Pacific Fund returned 0.60% in August and 7.57% for the year with a volatility of 2.85% and a Sharpe ratio of 1.72.

During August, the Totus Alpha Fund delivered 2.02% bringing the 12 month performance to 37.96% with a volatility of 15.63%.

CPD points are available for all FUND REVIEWS released this week including:

Monash Absolute Investment Fund; Microequities Deep Value Microcap Fund; Optimal Australia Absolute Trust; Alpha Beta Asian Fund

UPCOMING EVENTS:

15-17 October Grace Hotel, Sydney - Investment Performance Measurement, Attribution & Risk Management Forum will have leading experts sharing up-to-date, cutting edge ideas and insight on frontiers of recent developments in performance measurement.

21-22 Octoberin Sydney Post-Retirement Australia 2014 conference. Comprehensive two day forum for high profile cross industry participants to provide updates, insights and ongoing discussion into the key issues central to achieving optimal financial outcomes.

Friday 24 Octoberin Sydney Financial and Media Markets Charity Regatta Day out of Middle Harbour Yacht Club. Promises to be a fantastic day.

5-6 November, Grace Hotel, Sydney. Alternative Investments Conference - Investigating the rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.

This week's Now For Something Completely Different, this guy should buy a lottery ticket, he wasn't even wearing a helmet.

Best wishes for a happy and healthy week ahead,

Chris

CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

AIMA Australia Hedge Fund Forum - 16 September 2014: News Wrap

The AIMA Australia Hedge Fund Forum last week showcased the skill of local managers, their approach to business and their market views to local and international delegates.

Discussion also focused on how the Australian hedge fund industry can better engage with investors, and touched on the regulatory and market forces that are shaping the industry's future. Nearly 300 investors, managers and service providers attended the forum, making it the largest conference of its kind in Australia.

Highlights from the Forum included:

AUSSIES BEST IN LOCAL SHARES

• Australian hedge fund managers are "clearly" skillful in long/short Australian equities and "possibly" skillful in fixed  interest but are lagging international managers in global macro, over the past 10 years, according figures produced by Australian Fund Monitors for AIMA Australia. But, over the past five years, Australian global macro managers have performed as well as their international counterparts.

Read the entire "NewsWrap" here.

ATTACHED FILESAIMA Australia Hedge Fund Forum 2014 (pdf format)