Is the Hedge Fund Fee Frenzy a Furphy?

A cursory glance at the Index table on www.fundmonitors.com gives a stark reminder that while the fees charged by hedge and absolute return funds might be high compared with their "long only" counterparts, and higher again still than the increasingly popular ETF sector, you only get what you pay for.

YTD to the end of October equity based funds in AFM's database have returned 10.66% after all fees, against the ASX200 Accumulation Index (AI) which has returned a meagre 0.53%, and 12.39% over 12 months against a fall of 0.74% for the ASX200 (AI). So while it is easy for the detractors of hedge funds due to their higher fees, and performance fees in particular, when calculating the total cost of those fees to the end investor, the choice would seem pretty simple: Either pay for performance, or pay the price.

Certainly the performance of different funds varies, which is where research, and the ability of the underlying manager comes into play, but 80% of funds have outperformed the ASX200 YTD, and over 12 months that climbs to 83%. It would seem on the surface that the worse the market does, the better hedge funds do by comparison.

Putting aside individual skill for a moment (which we generally do not advise) the reasons behind the out-performance seems pretty obvious. The ability of a fund with a flexible investment mandate, including the ability to short sell, move to cash, or protect investors' capital using risk averse option strategies, provide a clear advantage over those funds which are forced to remain in the market come what may (ETF's), or have limited flexibility in overall stock, sector or asset allocation (long only, index aware).

Figures in today's AFR showed the rise of allocations to ETF's in particular, but why an investor, or their advisor would choose to do so escapes me. Sure the fees are minimal, and certainly they get market performance, but that's not much benefit when the market is going nowhere - or worse.

Price isn't everything: Quality and performance is, otherwise we'd all be eating hamburgers and pizza, and drinking vino collapso out of a cardboard box. So before making a decision based on the cost of an investment product, consider the value of the investment, risk of capital loss, and performance in both positive and negative markets.

FUND REVIEWS released this week: Morphic Global Opportunities Fund; Bennelong Kardinia Absolute Return Fund; Jamieson Coote Bonds Active Fund;  Meme Australian Share Fund; Bennelong Long Short Equity Fund

And on that note, I trust you have a safe and enjoyable week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

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• Jamieson Coote Bonds is a Melbourne-based Boutique Manager launched in December 2014.
• The Founders, Charles Jamieson and Angus Coote bring over 30 years of international experience dealing with central banks, hedge funds and real money managers.
• The Jamieson Coote Active Bond Fund is a long-only macroeconomic investment fund, investing in Australian Dollar denominated bonds backed by AAA and AA+ rated Government, Semi (State) Government and Supranational agencies.
• The Fund Objective is to out-perform the Bloomberg Australian Government Bond Index through active management in a sound risk-framework and usually holds around 20 bond securities of varying maturities.

ATTACHED FILESJCBAF Fund Review October 2015 (pdf format)

• The Fund is long biased, research driven, active equity long/short strategy investing in listed ASX companies with an nine year track record. 

• The Fund has significantly outperformed the ASX200 Accumulation Index since its inception in May 2006 and also has significantly lower risk KPI's. The Fund has an annualised return of 12.63% p.a. with a volatility of 7.29%, compared to the ASX200 Accumulation's return of 4.47% p.a. with volatility of 14.35%.

• The Fund also has a strong focus on capital protection in negative markets. Portfolio Managers Mark Burgess and Kristiaan Rehder have significant market experience, while Bennelong Funds Management provide infrastructure, operational, compliance and distribution capabilities.

ATTACHED FILESBennelong Kardinia Absolute Return Fund AFM Monthly Report October 2015 (pdf format)

MORPHIC GLOBAL OPPORTUNITIES FUND

ATTACHED FILESFund Review: Morphic Global Opportunities Fund October 2015 (pdf format)

OPTIMAL AUSTRALIA ABSOLUTE TRUST

AFM have released the most recently updated Fund Review on the Optimal Australia Absolute Trust.

We would like to highlight the following aspects of the Fund;

• 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 investment team comprising George Colman, Peter Whiting supported by Stephen Nicholls and Justin Hay have over 100 years combined experience in equity markets.

• In October, the Fund returned 1.42%. The Fund's approach to risk is shown by the Sharpe ratio of 1.49 (Index 0.17), Sortino ratio of 3.35 (Index 0.13), both of which are well above the ASX 200 Accumulation Index and has recorded 80% positive months.

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

Australian Fund Monitors

ATTACHED FILESOptimal Australia Absolute Trust AFM Fund Review October 2015 (pdf format)