One month into 2014, and one day into the Chinese Year of the Horse, and volatility is back with a vengeance. Not being an expert in such things as lunar cycles, and not believing too much in tea leaves or horoscopes to determine our futures I won't try to draw any conclusions between the two. What is clearly apparent is that markets and investors knew US tapering would have to start eventually, and with the first round occurring in December the next one would be sooner rather than later.

One old market adage is that they (markets) don't repeat themselves, but they do tend to rhyme. When readily foreseen or well telegraphed events finally occur, how come the markets react after, rather than leading up to the tipping point? A primary cause of this must be the psychology of many participants not changing over the decades, or down the centuries. For all the advanced technology available to investors, or maybe in part because of it, markets continue to rhyme.

So volatility has spiked, with emerging markets and currencies being particularly hard hit. No reasonable investor should be surprised given a number of well-known managers and market commentators have been saying for the last few months that the 20% returns from the ASX for each of the past two years would be a hard act to follow in 2014.

Risk will becoming a driving force once more, and with some exceptions, absolute return and hedge fund managers will once again prove their worth as being more adept at avoiding unpleasant surprises. For the record the average equity based fund in AFM's database has matched or bettered the annualised performance of the ASX200 accumulation index over the past one (20%), five (12.5%) and 10 years (9.6%) but with half or less the market's volatility.

The challenge, as always is knowing which are the exceptions, and which are exceptional.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Auscap's Long Short Australian Equities Fund delivered 2.57% during December and, taking full advantage of buoyant equity markets, returned 51.86% for the year.

The Pengana Australian Equities Market Neutral Fund returned 3.6% during December and 19.11% for the year to December 2013, a sound performance given it's correlation of -0.03 and neutral market exposure.

Allard's Investment Fund had a flat December and returned 11.64% for the previous twelve months with a low standard deviation of 6.99%, in line with its conservative investment philosophy.

FUND REVIEWS RELEASED THIS WEEK:

AFM's updated Fund Review for Insync Global Titans Fund for December 2013 shows the Fund delivering an annualised return of 11.41% and annualised standard deviation of 8.50% (since inception in October 2009) with sound risk-reward statistics.

Bennelong's Long Short Equity Fund is a research driven, market and sector neutral, "pairs" trading strategy investing primarily in large cap stocks from the ASX/S&P100 Index, with a ten year track record and annualised net returns of over 20%.

FUTURE EVENTS

Last days to register for the HFA Sydney Institutional Investor Roundtable  on 5 February 2014: This event is a roundtable discussion with refreshments provided. It is the second of the HFSB 2014 series of global institutional investor roundtables where investors and managers present practical case studies on topical issues. Held at the KPMG offices in Sydney, this is a FREE event, all welcome.

12 February 2014: Investment Administration Conference - Efficiency in a Regulated World. Doltone House, Hyde Park, Sydney.

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different to celebrate the Super Bowl this weekend, here is one of the cute commercials newly released for the occasion, and another that's just plain funny (and gross).

On that note, I hope you have a happy and safe weekend and Happy Chinese New Year (Kung Hei Fat Choi) as we move forward into the year of the Horse.

Best wishes,

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.

It is generally accepted that the bigger a fund becomes, the greater the inflows it receives. That might sound pretty obvious the other way around (in other words, the larger the inflows, the larger it becomes) but the reality was confirmed this week with figures produced by HFR in their Global Hedge Fund Industry Report.

Amongst the numbers showing the industry FUM as a whole now totals US$2.63 trillion, the concentration of inflows by fund size was significant according to  HFR numbers. For the full year to December 2013, investors allocated $40 billion to firms with greater than $5 billion, $16.6 billion to firms with between $1 billion and $5 billion in AUM, and $7.2 billion to firms with less than $1 billion in AUM.

Given the relatively fewer numbers of large funds with $5 billion or more under management, this left the high number of smaller firms, (although $1 billion is significant by Australian standards) fighting over the smallest piece of the pie. What is interesting is that the weighted average return of the HFR Index was only 9.2% for the year, a pretty underwhelming result given the S&P500 gained around 30%.

While not privy to all HFR's data, what is clear is that Australian managers, both large and small, generally performed well above their global peers in 2013, with an average return across all strategies of 15%, and with equity based funds returning over 20%. To be fair these averages were not weighted by FUM, but given the returns of two of the largest managers in AFM's database, Platinum and Magellan, both with over $15 billion, returning an average of 42%, the weighted result would be even higher.

Both Platinum and Magellan invest offshore, so would no doubt receive some benefit from the falling $A, but nonetheless both provided excellent returns.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Pengana Australian Equities Fund returned 1.27% during December with a month-end cash balance of 22%. Annual return was 18.60% (S&P/ASX 200 Accum 20.12%) with a volatility of 7.82% (Index 11.43%).

The Optimal Australia Absolute Trust returned 0.54% during December ending the month with a net exposure position of 11.1%.

Aurora Fortitude Absolute Return Fund returned 0.74% during December and 7.57% for the last 12 months with a volatility of 1.58% and only one month of negative returns. The Fund also recorded positive returns for the four months the equity market was negative over the last year.

The Totus Alpha Fund returned -0.39% during December and 60.19% for the year to December. Top contributors to performance over the month were long positions in Australian index futures +1.72%, Japanese index futures +1.6% and a short in Transfield Services +0.75% (mining services).

Intelligent Investor Value Fund returned 0.38% during December and 44.21% over the last twelve months with a set of very strong risk statistics, notably a Sharpe ratio of 3.36.

FUND REVIEWS RELEASED THIS WEEK:

The Bennelong Kardinia Absolute Return Fund is long biased, research driven, active equity long/short strategy investing in listed ASX companies with a seven year track record. The Fund returned 1.11% in December 2013, taking returns for the year to 14.78%, broadly in line with annualised returns since inception in May 2006 of 14.10%. By month-end the Manager had increased the Fund's net exposure to 74.8%, 82.5% long and 7.7% short.

FUTURE EVENTS

5 February 2014: HFA Sydney Institutional Investor Roundtable - Complimentary roundtable discussion with refresments provided. This is the second of the HFSB 2014 series of global institutional investor roundtables where investors and managers present practical case studies on topical issues.

The Hedge Fund Standards Board is a standard setting body for the global hedge fund industry, which brings together investors and managers from around the world to promote high standards of practice in the industry. It is custodian of the Hedge Fund Standards which: (a) provide a mechanism for promoting transparency, integrity and governance; (b) facilitate investor due diligence; (c) help safeguard the reputation of the industry; (d) complement public policy.

12 February 2014: Investment Administration Conference - Efficiency in a Regulated World. Doltone House, Hyde Park, Sydney.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different, Sam Kekovich, Lambassador for Australia encouraging us to throw a bit of lamb on the barbie this weekend.  For the benefit of our overseas recipients, Monday 27 January is an Australia wide public holiday and we will be taking advantage of a relaxing 3 day weekend.

On that note, I hope you have a happy and safe Australia Day long weekend.

Best wishes,

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.

Bernie Madoff, the fraudster who ripped $65 billion off investors over a 20 year period, and who in spite of not actually being a hedge fund did nothing to help the industry's reputation, reportedly has advanced kidney cancer, and recently suffered a heart attack. It seems he might not get to serve out his full 150 year sentence.

Meanwhile Shawn Richard, the only person jailed over the Trio Capital/Astarra fraud (which was a hedge fund) was reportedly released from goal this week after serving his minimum two and a half year sentence. At the same time financial adviser Ross Tarrant, who was banned by ASIC for seven years for recommending his clients invest in Richard's fraud (and presumably benefited from the significant commissions on offer) has lodged a submission with the Federal Court to appeal the AAT's upholding of his ASIC ban order.

Welcome back, with somewhat belated Happy New Year wishes. AFM and "Hedge Clippings" took the opportunity for a figurative re-charge of the batteries, which in my case consisted of the traditional over-indulgence, and resultant side effects, to the tune of about 5kgs on the scales. I tried to convince myself that the scales themselves might have their own battery problem, but sadly not. 

So back to the grindstone, armed with the same resolutions (as one of my children not so kindly noted) I made 12 months ago. The 5/2 diet, (it works for me anyway) more laps of the local pool, and lower the alcohol consumption.  There's even a plan to go the whole month of February without touching a drop, but as I have found in the past, even the best laid plans can go astray!

One task I did achieve over the break was to attack my overloaded email inbox, which regularly receives 150 to 200 or more messages a day, and needless to say I consistently fail to clear. I came across a program called SaneBox which promised to sort regularly read and important messages from the irregular, or unimportant ones. With some trepidation I tried it.

After advising me it might take some time to sort through the 156,783 emails I had or hadn't previously read and actioned, it completed the task in less than half an hour, and it would appear to date, very successfully.  Don't ask me how it works, but here's a link to more information.

Of course when it comes to assigning Hedge Clippings to "Important" or "Later", you will have to make your own decision!

Now getting back to reality, taking a look back at fund performances for December and 2013 as a whole, and a look forward to what might be in store in 2014.

Although only about half of December's results are to hand, returns are looking as if the industry finished the year on a sound note, up 1.5% for the month, and taking full year returns to 15.58%. Comparative performances for the ASX200 Accumulation Index were +0.79% and +20.12%, although equity based funds outperformed with returns of +1.70% and +21.24%  respectively. 

From a strategy perspective Equity 130/30 outshone all others, albeit with only a relatively small sample size, returning 37.56% in 2013, followed by Equity Long at 25.61% and Equity Long/Short at 20.44%, and Equity Income on 19.96%. At the other end of the scale Currency/FX funds lost 4.93% on average, and Commodity/CTA's 2.75% to round off a disappointing year. Full details are available here.

Individual fund performances ranged from +90% down to -55%, with just under 30% of funds outperforming the ASX200 Accumulation's +20.12% over the year, and 87% delivering positive returns.

One interesting statistic is that the ASX200, while enjoying a sound year, significantly underperformed other developed markets and in particular the S&P500 accumulation return of 32%. However, when reviewing overseas and global hedge fund returns and databases, it would appear that average fund returns in 2013 were less than 10%, significantly underperforming the market. One can speculate on the reason, but it might be the broader range of strategies employed overseas, particularly in the non-equity space of credit and bond funds, which suffered compared to their equity counterparts.

AFM's full analysis of the Australian Absolute Return and Hedge Fund sector will be available once all fund's December returns have been received later this month. If you like to receive a copy please send us an email.

Looking forward, the general view of managers we have spoken to is a more subdued return from markets than in 2013, but with higher volatility, which has been the recent trend based on December's market (down over 4% at one stage before recovering in the Christmas rally) and month to date in January. The A$ appears to have further downside potential, having fallen 16% since it highs last year, and Australia's economy is likely to see headwinds, while the US recovery gradually takes place.

Overseas, and globally, tapering will stay firmly on the agenda, but with Janet Yellen due to take the reins from Ben Bernanke at the end of this month, the questions will be at what pace, and to what degree will she change direction. Politicians and policy, here in Australia and overseas will no doubt continue to take centre stage and therefore the controls; China may or may not avoid a hard or soft landing; and the Middle East will sadly continue to hit turbulence.

Looking back 12 months to January 2013 nothing much seems to have changed except some of the names and faces of the players.  

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Bennelong Kardinia Absolute Return Fund returned 1.11% in December 2013, taking returns for the year to 14.78%, broadly in line with the Fund's annualised return since inception of 14.10%. The Fund's December performance was achieved in a market which although positive lagged most of its global developed market peers, and which at one stage was down over 4% on concerns over the US tapering of asset purchases. By month end the Manager had increased the Fund's net exposure to 74.8%, based on 82.5% long, and 7.7% short.

The Monash Absolute Investment Fund returned -0.60% during December 2013 bringing the 12 month return to 30.41% as compared to the S&P/ASX 200 Accum return of 20.12% with a lower volatility of 8.55% as compared to 11.43% for the Index. The Fund's month-end exposures were 83% net and gross 86%. The Manager discusses a number of portfolio holdings including Royal Mail, Greencross and Silver Chef.

Morphic Global Opportunities Fund returned 3.85% during December as the Fund benefited from $A weakness, holdings in US stocks as well as a short position on US bonds and other currencies. Full year performance was 42.49%, in line with the Fund's benchmark. The Fund closed the year fully invested, but with a significant overweight to developed markets, led by Japan, and a large underweight in emerging markets.

The Bennelong Long Short Equity Fund returned 2.68% during December bringing twelve month performance to 22.46%. The Fund now has 11 years of unbroken positive returns. Annualised performance since inception in January 2003 is 20.94% with the Fund's maximum drawdown 12.22%. Comparative ASX 200 Acc figures are 10.08% and 47.19%.

Insync Global Titans Fund returned 4.9% in December ahead of the MSCI All Country Index in $A at 4.0% with the Fund recording an up capture ratio of 0.45 and down capture ratio of -1.17 over the last 12 months.  The Fund's Sharpe ratio of 3.18 is notable as is the maximum drawdown on 2.54%, also over the last 12 months. The Fund has no foreign exchange hedging in place and benefitted from the 2.1% depreciation of the Australian dollar against the US dollar in December.

FUTURE EVENTS

5 February 2014: HFA Sydney Institutional Investor Roundtable - Complimentary roundtable discussion with refresments provided. This is the second of the HFSB 2014 series of global institutional investor roundtables where investors and managers present practical case studies on topical issues.

The Hedge Fund Standards Board is a standard setting body for the global hedge fund industry, which brings together investors and managers from around the world to promote high standards of practice in the industry. It is custodian of the Hedge Fund Standards which: (a) provide a mechanism for promoting transparency, integrity and governance; (b) facilitate investor due diligence; (c) help safeguard the reputation of the industry; (d) complement public policy.

12 February 2014: Investment Administration Conference - Efficiency in a Regulated World. Doltone House, Hyde Park, Sydney.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different, Clark the talking dog expresses his disappointment on missing out on some tasty treats.

On that note, I hope you have a happy and safe weekend.

Best wishes,

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.

AFM will be closed for the Christmas break from Monday 23 December 2013 and will re-open on Monday 13 January 2014. Our website and database will continue to be updated during this time.

If you have any urgent requirements, please call 02 8007 6611 and leave a message, or send us an email.

We hope that you have a wonderful Christmas and if you are going away, a safe and happy holiday. Here are the AFM Christmas elves with a little bit of song and dance.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Buy the rumour, Sell the fact - or in the case of the reaction to the FED's announcement of the start of the tapering process, Sell the rumour, Buy the fact has never seemed more accurate, even if it does turn out to be a one day rally. The taper news probably overshadowed the decision, or indication, that interest rates would stay close to zero for longer, but in any event US investors and the market should break for Christmas with a reasonably positive outlook heading into 2014.

Having enjoyed a solid 2013 I would expect they'll be reasonably pleased about the year just past, unless they were long resources, and gold in particular. Looking at the average returns of funds in AFM's database as an example, although only to the end of November, equity based funds are up 19.19% year to date, neck and neck with the ASX200 accumulation index which gained 19.18% over the same period. Non-equity funds have struggled meanwhile, rising only 4.06% YTD to the end of November.

Meanwhile on the regulatory front, Australia's new government probably hasn't had the best press since its election in September. Today's announcement by the Assistant Treasurer, Senator Sinodinis of significant amendments (aka watering down) of the Future of Financial Advice (FOFA) legislation is likely to receive mixed reactions. The proposed changes will undoubtedly reduce the cost and inconvenience to the industry created by the original FOFA, but various measures designed to protect, or inform investors and consumers would seem to have been significantly reduced in the process.

As a result the reaction will no doubt depend on which side of the desk you happen to be sitting. Or as former PM Paul Keating once famously quoted: "In the race of life, always back self-interest, at least you know it's trying."

This will be the last edition of "Hedge Clippings" for 2013 as we head to the sand and the surf to work off the excess intake that is likely to take place next week, past performance in this case being a very reliable guide to future consumption. We'll be back bigger (as usual) and hopefully better than ever, with some exciting developments in store for investors and fund managers alike.

In the meantime thank you for your readership and interest over the past year, and wishing you a wonderful Christmas, and a safe, healthy and prosperous New Year.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Optimal Australia Absolute Trust returned -0.52% during November bringing the twelve month performance to 1.61% and annualised returns since inception (Sept 2008) to 10.45% p.a. with a volatility of 3.62% p.a. The Fund's net risk exposure was 4.0% while gross exposure was 67.2%. Long investments returned -0.58% while short investments returned 0.04%.

The Aurora Fortitude Absolute Return Fund continues to deliver low risk returns recording 0.52% during November and 6.80% for the last 12 months with a volatility of 1.67%. The Fund has a Sharpe ratio of 2.33 and a maximum draw-down of 0.19% over the last twelve months as compared to the S&P/ASX 200 Accumulation Index draw-down of 6.72%.

Bennelong's Long Short Equity Fund returned -1.80% during November and 20.32% for the previous twelve months with a below market volatility of 9.36% p.a. (S&P/ASX 200 Accumulation Index 11.51%). The Fund's long-term performance remains strong with a since inception (Jan 2003) annual return of 20.82% as compared to the Index of 10.08% p.a. with a slightly below Index volatility. The Fund's maximum draw-down is notable at -12.22% as compared to the Index value of -47.19% as is the Fund's Sharpe ratio at 1.25 as compared to 0.43 (Index).

The Cor Capital Fund returned -0.90% during November, a weak month for equity markets which returned -1.31% (S&P/ASX 200 Accumulation Index). The Manager comments 'During November the Fund's cash holdings made the largest positive contribution to performance (+0.08%) with equities (-0.26%) and precious metals (-0.64%) making negative contributions to the overall return.'

FUND REVIEWS updated this week include:

Morphic's Global Opportunities Fund is a global equity long/short manager with a long bias and a macro-economic overlay. The mandate allows the Fund to short sell, use derivatives and invest in assets such as commodities & currencies as Fund's philosophy is that only Managers with flexible investment and hedging strategies will be able to deliver acceptable, steady, real, absolute returns over the investment cycle.

FUTURE EVENTS

12 February 2014: Investment Administration Conference - Efficiency in a Regulated World.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

We hope that you have a wonderful Christmas and if you are going away, a safe and happy holiday. Here are the AFM Christmas elves with a little bit of song and dance:

On that note, Merry Christmas and we will see you again in the new year!

Best wishes,

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.

Last week we wrote of the unfamiliar weakness of the ASX in November, and the apparent disconnect between the local market and the US. In December the ASX200 has continued to decline with a range of less than positive news damaging investor confidence and enthusiasm. November's general market weakness was put down to some pre-Christmas fatigue, profit taking to chase a range of new IPO's (which have been largely uninspiring on debut) possibly some broader political/economic concerns, and finally some offshore selling on concerns for a weaker A$.

Not so long ago there was hope for returns of 25% for the ASX200 in 2013, which with a week and a half to go look more likely to be 15%. To the end of November Equity based funds in AFM's database had returned just under 20% YTD, much in line with the ASX200, with 82% of funds to date outperforming in November.  

With the A$ trading below US$0.90 the currency view was certainly correct, assisted by some overnight comments from RBA Governor Stephens who would be happy to see it fall further.  Elsewhere this week the decision by General Motors to finally bite the bullet and cease manufacturing Holden cars in Australia from 2017, based on uncompetitive labour costs and agreements and the equally uncompetitive currency, probably helped. 

Coupled with the previously announced decision by new Treasurer Hockey to knock back the foreign takeover of GrainCorp, and the posturing about "eavesdropping" on our neighbours by Australia's security agencies (after all, amongst other things, isn't that what they're there to do, and don't they do the same to us?) and there hasn't been too much positive news on the political or economic front.

All is not lost though. The Wallabies seem to be getting their mojo back. Australia are two up in the cricket against the "old enemy" England... surely we can't blow it from here? And there you have it: The sun's shining, the beach beckons, the Christmas parties are in full swing.  It's all a case of priorities!

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Morphic's Global Opportunities Fund returned 5.48% in November and 41.50% for the previous twelve months with a volatility of 9.06% p.a. Fund exposure was 112% net at month-end and 169% gross with a VAR of 1.30% at the 95th percentile.  Largest sector exposures were Financials, Information Technology and Consumer Discretionary with geographic exposure dominated by North America.

The top three active positions were US financials, a Global Cylical Basket and a Data Centre Spread with the first two positions net long and the last position net flat. The Fund also had currency position in the USD/Yen and an interest rate position that was long European Rates.

The Bennelong Kardinia Absolute Return Fund returned 0.15% during November and 14.73% for the previous 12 months as compared to the S&P/ASX 200 Index return of 23.18% but with a volatility of 2.83% as compared to 11.51% for the Index. Since inception in May 2006 the Fund has delivered 14.10% p.a. (4.69% Index) with a volatility of 7.78% (14.70% Index).

Short positions in Westpac and Westfield and long positions in Henderson and Macquarie were the largest positive contributors to performance, whilst long positions in Sirius and Carsales were the largest detractors. The Fund's net equity market exposure decreased to 56.9% (86.6% long and 29.7% short).

Monash Absolute Investment Fund returned -0.58% in November and 35.0% over the last year with a Sharpe Ratio of 3.49. The Fund had a month-end net exposure of 98% and gross exposure of 107%. Notable risk statistics for the Fund are the draw-down of -1.35% (S&P/ASX 200 Accum -6.72%), Up capture ratio of 0.69 and Down capture ratio of -0.13 with 76% positive months. All data is since inception in May 2012.

The Manager discusses a number of portfolio holdings including Emerchants, Technology One, Ozforex and Emeco Holdings.

The Insync Global Titans Fund returned 4.4% during November and twelve month return of 23.47% with low volatility of 6.67% p.a. The Fund's continues to record sound risk statistics with an annualised volatility of 8.36% p.a. (S&P/ASX 200 Accumulation Index 12.24% p.a.), a maximum draw-down of 4.39% (15.13%) and a down capture ratio of -0.52.  

The biggest contributors for the month were Time Warner Cable (a subject of takeover speculation), Coach, Wyndham Worldwide, Reckitt Benckiser and Oracle. The Fund benefited from the depreciation of the Australian dollar during the month, having no foreign exchange hedging in place.

FUND REVIEWS updated this week include:

BlackRock's Multi Opportunity Fund offers broad diversification across asset classes including equities, fixed income, currencies and commodities with an attractive risk profile, having provided double digit returns in 2009 through 2012 with low volatility of 4.17% since inception. 

The current strategy has seen the Fund record only three negative months since May 2010, leading to annualised returns over the past 48 months (to October 2013) of 11.74% and an annualised volatility of 2.16% pa. The four year Sharpe Ratio is 3.60, indicating an excellent reward-to-risk ratio.  BlackRock's Active Scientific involves extensive research into every aspect of the investment process starting with the identification of fundamental investment insights. These are thoroughly tested to ensure that the outcome consistently adds to performance: Quantitative analysis is also applied to balance both performance and risk ensuring the position is only taken when the potential for reward is adequate. Only insights meeting this multi level process are implemented into portfolios.

FUTURE EVENTS

12 February 2014: Investment Administration Conference - Efficiency in a Regulated World.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

While on the subject of cricket, today's the anniversary of the birthday WG Grace in 1850. And now for something completely different, Dionne Warwick's birthday was yesterday. Here she is in 2000 in a live tribute to Burt Bacharach and Hal David. It's a long clip, but you don't have to watch it all.

On that note, enjoy the week-end!

Regards,

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.

November Performance:

November saw the ASX200 decline for only the fourth month since June 2012, falling 1.94%, or 1.31% on a total return basis. The Australian market also disconnected from the S&P500 which rose 2.8%, and the A$ also lost ground. November fund results are positive overall, currently +1.59%, although with only 10% of fund reports to hand it is early days yet.

Even with the limited sample size there's a clear indication of where the action was in November, with the combination of positive offshore markets and a falling A$ clearly evident.  Funds investing in Asia are currently averaging +5.2% for the month, Asia ex Japan +4.91% and Global +2.76%. Meanwhile Australian strategies are negative -0.18%. Only one week into December and there's some unfamiliar softness around the local market, with managers reporting that local investors are cashing up to take advantage of the pre-Christmas IPO rush, and offshore investors are concerned about potential further weakness in the A$ on the back of a stronger US currency.

There could also be some investor fatigue, combined with the realisation that 12 month equity returns of 25% don't continue forever. Perhaps some disappointment over what's looking like the shortest political honeymoon in history is also having an effect, along with the realisation that actual forward earnings might not match current expectations. Overseas indications are that QE tapering will eventually end, with US 10 year bond futures moving towards 3% also pressuring offshore markets.

Christmas cheer of the liquid kind might also be distracting some local  investors, with only two week's full trading remaining before the traditional summer break looms for most market participants, with indications that many won't return to the fray until mid-January at least.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

The Cor Capital Fund returned 0.56% during October and has delivered a return of 6.05% p.a. since inception (August 2012) with a volatility of 6.41%; in line with its goal of stable medium-term returns with liquidity, transparency and balance.

The Manager comments that during October the Fund's equities holdings contributed the most to performance (+1.07%) and this was partly offset by precious metals (-0.46%). Following a movement of some asset classes above defined limits, funds were allocated to precious metals and away from equities, fixed interest and cash at the end of the month in line with the Fund's re-balancing policy. This active risk management is critical to the Fund remaining prepared for a range of market outcomes.

BlackRock Multi Opportunity Fund returned 1.54% during October and 6.69% over the last 12 months with a volatility of 2.16%.

The Multi Opportunity Fund delivered strong performance in October with strong contributions from both Global Equity Long/Short and European Equity Long/Short strategies. The International Alpha Transport, Fixed Income Global Alpha and Australian Equity Long/Short strategies also added value. The fund returned 1.83% gross of fees versus the RBA cash benchmark return of 0.21%. Year to date, the Fund has returned 7.36% gross of fees.

The Australian Equity Long/Short strategy's performance benefited from an overweight to iron ore producers versus other miners. Underweight positions in mining services companies were also profitable with further downgrades across the sector. Other outperforming positions were over-weights in wealth managers which continue to run due to exposure to the rising market, and positive stock selection within the healthcare sector. The main performance detractors came from underweight positions in domestic cyclicals such as building materials, retail and media.

The CSAG Long Only Program returned -0.28% during October and -7.09% for the previous twelve months in a difficult commodities market. At month-end the Fund's allocations were approx Soft Commodities 8%, Grains 5%, Energy 20% and Metals 25%. The residual of 42% was in cash.

Since inception in April 2004 the Fund has delivered 5.68% p.a. as compared to the Dow Jones- UBS Commodities Index return of -0.30% p.a. over the same time frame. Annualised standard deviation for the Fund was 13.18% as compared to 18.26% for the Index.

FUND REVIEWS updated this week include:

The Aurora Fortitude Absolute Return Fund (AFARF) has a 8 year track record investing in ASX listed equities. A Market Neutral overlay is used across a multi strategy approach which allows for flexible asset allocation to maximise returns and minimise risk under a variety of market conditions and cycles.CIO John Corr has over 20 years financial market experience with a strong focus on risk.

Significant use of low risk "long" derivatives and option overlays has provided positive returns with low volatility during periods of market dislocation. Annualised return since inception is 8.17% with a very low standardised standard deviation. Over 87% of monthly performances have been positive, with no losing months in 2008 and a largest drawdown of -2.09%.

ASX listed Aurora Funds Limited was established on the merger of three existing fund management businesses, managing approx. $480m on behalf  of more than 2,500 retail and wholesale investors.

BlackRock's Australian Equity Market Neutral Fund portfolio generally consists of approx. 180 stocks in equally weighted long and short portfolios to maximise potential returns while minimising market volatility. The strategy has recorded a return of 12.01% since inception (Sept 2001) as compared to the ASX 200 Accumulation Index return of 8.80% and with a volatility less than one-half that of the Index at 5.67% pa as compared to 13.18% pa.

The Fund has also recorded a maximum drawdown of 12.41% as compared to 47.19% for the Index and has had 78% positive months since inception.

Blackrock operates in 27 countries including Australia (where BlackRock has A$48.6 billion in FUM - March 2013) managing a broad range of strategies across a variety of asset classes.

FUTURE EVENTS

12 February 2014: Investment Administration Conference - Efficiency in a Regulated World.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

As we mentioned last week, for something completely different Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. Although we usually like to include a humorous clip every week, we were moved by watching Gavin's Bridge Climb and urge you to take a few minutes to see it for yourself.

Did You Know?

• Did you know that every 15 hours an Australian child is born with Cerebral Palsy, that means 1 in 500 babies. 
• Did you know Cerebral Palsy is the most common physical disability in children.
• Did you know that 1 in 3 children with cerebral palsy cannot walk; 1 in 5 children cannot talk; 1 in 4 children have epilepsy and 1 in 2 children live with chronic pain every day.
• The Cerebral Palsy Alliance Research Foundation was established in 2005 and over half of the most effective treatments have been discovered since then.
• Before 2005 less than $1 million per year was being spent in Australia on relevant research. 

For more information visit www.cpresearch.org.au or contact me by email chris.gosselin@fundmonitors.com

On that note, enjoy the week-end!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Research and Database Manager
Australian Fund Monitors

ATTACHED FILESAurora Fortitude Absolute Return Fund AFM Fund Review October 2013 (pdf format)

Looking back over previous issues of "Hedge Clippings" we frequently mention the subject of demographics and the challenges ahead for Australia's and the world's economies, and society. Maybe that's an indication of the fact that in one way, as a member of the over '50's generation, advancing age, like an option's time decay, affects me more as I approach expiry. High on our list of concerns is the challenge facing governments regarding the expansion of the ageing population, longevity and the cost of lengthening retirements.

With that in mind this week we attended an excellent Deloitte's presentation of the findings of their research and forecast into the Dynamics of the Australian Superannuation System.  Space doesn't permit listing all the findings or recommendations, so you can find a copy of the presentation here.  However some pertinent facts include the projection that over the next 20 years:

• The value of assets in Australia's superannuation system will grow from the current $1.6 trillion to $7.6 trillion by 2033.
• This growth is based on the super guarantee level rising to 12% (deferring the introduction of the 12% level makes little difference) and an average annual return rate of 6.8%.
• Increasing the retirement age by 5 years from the current 65 to 70 would add a further $1 trillion.
• SMSF's, already the largest market segment will remain so, are forecast to grow to $2.25 trillion, with over one third of that held in post-retirement assets.
• For every three (tax paying) workers in 2033, there will be more than one retiree, most of whom will be on a government pension.
• While overall population growth is forecast at around 27%, it will exceed 100% in the age brackets of 75-80, 80-85, and 85+.

Meanwhile 50% of all children born today will live to be 100, and the life expectancy of a 65 year old retiring today is 85, and rising. Consider the fact that when the aged pension was first introduced in Europe, if you retired at 65 you were unlikely to live more than 3 more years.

Governments meanwhile are between a rock and a hard place, needing to fund the ageing and increasingly long lived and expensive retirees, but reluctant to take the unpopular decisions to do so.

So what's my point, apart from the fact that although technically correct that I'm a member of the over '50's generation, I am sadly beyond that milestone as well? Firstly given the above statistics, the 12% SGL is insufficient to fund most peoples' retirement.

Secondly, as far as investment strategy and asset allocation are concerned, finding a home for the $7.6 trillion in super over the next 20 years will force, or encourage, greater investment in global markets. 

And finally, although hard to achieve, a return of greater than 6.8% per annum will be required to fund a reasonable retirement, and in our (possibly biased view) that's more likely to be achieved through an increased allocation to absolute return strategies.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

The Totus Alpha Fund returned a very strong 14.2% for October bringing the since inception (April 2012) annualised return to 32.83%. The Fund has a Sharpe ratio of 1.76 and a Sortino ratio of 5.70 indicating a sound risk-reward ratio. The comparative data for the ASX 200 Accumulation is 1.42 and 2.14.

Auscap's Long Short Australian Equities Fund recorded a strong 5.46% during October bringing the six month return to 26.66%. The Fund's up and down capture ratios are notable at 1.02 and -0.62 respectively. The Fund's average gross capital employed was 122.8% long and 24.3% short. Average net exposure over the month was +98.4%. At the end of the month the Fund had 24 long positions and 7 short positions. The Fund's biggest exposures at month-end were spread across the consumer discretionary, financials, healthcare and telecommunications sectors.

The AFM Prism Active Equity Fund returned 1.29% (e) for October and has returned 6.08% p.a. with a volatility of 2.43% since inception.  The Fund is characterised by very low risk with a standard deviation of 2.43% as compared to the ASX 200 Accumulation Index number of 10.75%, a maximum draw-down of -1.42% (Index -6.72%) and a worst month performance of -0.62% (Index -4.50%). The Sharpe ratio was 1.27 and the average monthly return in negative markets was 0.49%. All statistics are since inception in October 2012. The Fund has re-allocated to three new funds to provide more upside exposure in buoyant markets while maintaining an ongoing focus on targeting low volatility. 

Aurora Fortitude's Absolute Return Fund returned 0.28% during October and 6.82% for the latest 12 months with a volatility of 1.67%. The Fund continues to deliver steady returns within a low risk framework with 88% positive months, a maximum draw-down of 2.09% (ASX 200 Acc Index 47.19%) and downside deviation of 1.31 (Index 10.80) since inception in March 2005. 

Yield was the best performing strategy for the month (+0.14%) and the Long/Short strategy also had a strong month (+0.11%).  As with many of the stronger monthly market moves, the Options strategy was again a draw-down (-0.12%). The S&P/ASX200 index puts and calls were a cost to the Fund as realisable volatility was lower than the implied volatility paid to own the market protection.

The Pengana Asia Special Events (onshore) Fund returned 1.10% for October with a long term performance (since Oct 2008) of 12.01% pa (Index 7.99% pa) and a low market correlation of -0.1. The Fund's risk statistics are sound with a volatility of 6.28% (Index 14.73%), maximum draw-down of 4.05% (Index 25.80%) and a down capture ratio of -0.46. The positive contribution from M&A positions dominated the performance for the month, and this continues to be the most significant component within the Fund's strategic allocation. Australian and Hong Kong / Chinese markets proved particularly profitable while solid gains were also made in India and Thailand. All strategies made positive contributions for the month. The Fund maintained an average net and gross exposure of 11% and 155% respectively. 

BlackRock's Australian Equity Market Neutral Fund returned 1.12% in October bringing its since inception (Oct 2001) return to 12.01% pa (ASX 200 Acc Index 8.80% pa) with a volatility of 5.67% (Index 13.18%). Notable are the Fund's maximum draw-down of 12.41% (Index 47.19%) and down-side capture ratio of -0.60. The Manager notes that the Fund's performance benefited from an overweight to iron ore producers versus other miners as the iron ore fines price remained above market expectations. Short positions in mining services companies were also profitable with further downgrades across the sector. Other outperforming positions were over-weights in wealth managers which continue to run due to exposure to the rising market, and positive stock selection within the healthcare sector. The main performance detractors came from short positions in domestic cyclicals such as building materials, retail and media.

FUND REVIEWS updated this week include:

The Optimal Australia Absolute Trust Optimal Australia is a specialist Australian equity investment manager and the Fund has a long/short equity strategy typically with a low but variable net market exposure comprising 40 to 65 stocks broadly selected from within the ASX200. The Fund has recorded out-performance of the market since inception in September 2008 with approximately 84% of monthly performances having positive returns and the largest drawdown -1.38%.

Bennelong Kardinia's Absolute Return Fund The Fund is long biased, research driven, active equity long/short strategy investing in listed ASX companies with a seven year track record. Since inception in May 2006 the Fund has returned 14.24% p.a. as compared to 4.93% (S&P/ASX 200 Accumulation Index) with a volatility of 7.81% p.a., around one-half of the ASX volatility of 14.76% p.a. The Bennelong Kardinia Absolute Return Fund rose 2.17% in October. 

The Insync Global Titans Fund The Global Titans Fund invests in a concentrated portfolio of 15-25 stocks, targeting exceptional, large cap global companies with a strong focus on dividend growth and downside protection. The Fund's unit price increased by 1.5% in October, with the largest positive contributions coming from our holdings in CR Bard, Reckitt Benckiser, Wyndham Hotels, British Sky Broadcasting and Sanofi. The main detractors for the month included Coach and Dr Pepper Snapple. Portfolio selection is driven by a core strategy of investing in companies with sustainable growth in dividends, high returns on capital, positive free cash flows and strong balance sheets. Emphasis on limiting downside risk is through extensive company research, the ability to hold cash and long protective index put options.

EVENTS

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

Now for something completely different, something completely different... Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. Although we usually like to include a humorous clip every week, we were moved by watching Gavin's Bridge Climb and urge you to take a few minutes to see it for yourself.

Did You Know?

• Did you know that every 15 hours an Australian child is born with Cerebral Palsy, that means 1 in 500 babies. 
• Did you know Cerebral Palsy is the most common physical disability in children.
• Did you know that 1 in 3 children with cerebral palsy cannot walk; 1 in 5 children cannot talk; 1 in 4 children have epilepsy and 1 in 2 children live with chronic pain every day.
• The Cerebral Palsy Alliance Research Foundation was established in 2005 and over half of the most effective treatments have been discovered since then.
• Before 2005 less than $1 million per year was being spent in Australia on relevant research. 

For more information visit www.cpresearch.org.au or contact me by email chris.gosselin@fundmonitors.com

On that note, enjoy the week-end!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook