Last week "Hedge Clippings" noted that while negative, or historically low interest rates around the world caused by QE in the US and European and Japanese Central Bank Intervention (CBI) is working up to a point, it is still a great experiment that we had to have to avoid a complete meltdown during and post the GFC. As such, the end outcome has yet to be determined.

China's economy is still a question mark, although is likely to be a major beneficiary of the lower energy prices - if and while they last. The crackdown on the margin lending which has helped to push the Shanghai market so strongly over the past six months will however be interesting.

Europe won't respond to CBI the way the US did to QE simply because there are 28 different economies and nationalities at work. It is not universal. The world is facing deflation and 0% or negative interest rates, and as we indicated in last week's Hedge Clippings there's likely to be tears before bedtime.

The question is when? Investors will continue to chase whatever yield they can find, and bank deposits aren't where they will find attractive returns for a while. Hence equity markets, and particularly the six great dividend payers in Australia (the big four banks, Wesfarmers and Telstra) although expensive on most counts, will remain well supported, as evidenced by the Commonwealth Bank hitting $90 today.

So there's a significant anomaly: In spite of the risk of concentration in just a handful of stocks, and in spite of the risk of buying assets which on any normal valuation are significantly overpriced, investors are still happily allocating to equities and if the RBA cuts rates again next Tuesday as many expect, are likely to continue to do so. Meanwhile more and more commentators and fund managers are warning of the risks.

They are doing so on the assumption there won't be any shocks to the system, be it an economic or political black swan event, which of course can't be ruled out. For example, oil prices halving in 6 months out of the blue is likely to cause some serious pain in some sectors of the US (shale oil) market and in Russia, even if we can now afford to fill the car's petrol tank.

So what to do? A sensible investor (if they believe the nervous nellies) might buy some insurance in the form of long dated out of the money index put options. Or just continue to dance until the music stops, and hope for the best.

But hope is generally not considered to be the best strategy.

Specific results received this week include the following PERFORMANCE UPDATES:

Paragon Fund returned -0.50% (ASX 200 Accum 2.06%) during December with annual returns at 16.09% (Index 5.61%) with a volatility 15.16% (Index 10.95%).

The Pengana Absolute Return Asia Pacific Fund returned 0.74% in December and 6.20% for the year with a volatility of 2.79% and a Sharpe ratio of 1.29.

Auscap Long Short Australian Equities Fund recorded a return of 0.44% in December with the annual return 23.17% and a volatility of 7.46%.

The Avenir Capital Value Fund returned -4.42% during December 2014 with annual performance of 15.38% and volatility of 11.11% since inception.

Chris
CEO, AUSTRALIAN FUND MONITORS

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• The Aurora Fortitude Absolute Return Fund  (AFARF) has a 10 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. Risk statistics are impressive and shows the Funds risk philosophy; over 86% of monthly performances have been positive with no losing months in 2008, annualised standard deviation of 2.71%, the Fund's largest drawdown is -2.09% and the Sharpe ratio 1.05.

• ASX listed Aurora Funds Limited was established on the merger of three existing fund management businesses, managing approximately $230m on behalf  of more than 2,500 retail and wholesale investors.

ATTACHED FILESAurora Fortitude Absolute Return Fund - AFM Fund Review December 2014 (pdf format)

BENNELONG LONG SHORT EQUITY FUND

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

CPD Points are now available for all AFM Fund Reviews. Read the review and answer 5 questions to earn half a point toward your continuing professional development.

• The Fund is a research driven, market and sector neutral, "pairs" trading strategy investing primarily in large cap stocks from the ASX/S&P100 Index, and has produced an annualised return of 17.25% against the broader ASX200 Accumulation return of 8.11%.

• The consistent returns across the investment history indicates the Fund's ability to provide positive returns in volatile and negative markets and significantly outperform the broader market.

• Fund performance was muted for the month as the market drifted without any strong thematic and investors were subject to merger and acquisition activity/speculation, yield/defensive buying and stock specific issues. Our assessment is that the April factors that negatively impacted fund returns, which were of a more global nature, were persisting early in the period but since have abated. Fund activity was limited in May as our view of market fundamentals have not really changed.

Sean Webster
Research and Database Manager
Australian Fund Monitors

ATTACHED FILESBennelong Long Short Equity Fund December 2014 (pdf format)

ALPHA BETA ASIAN FUND

ATTACHED FILESAurora Fortitude Absolute Return Fund - AFM Fund Review December 2014 (pdf format)

OPTIMAL AUSTRALIA ABSOLUTE TRUST

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

CPD Points are now available for all AFM Fund Reviews. Read the review and answer 5 questions to earn half a point toward your continuing professional development.

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.

• The Fund's approach to risk is shown by the Sharpe ratio of 1.51, Sortino ratio of 3.77, both of which are well above the ASX 200 Accumulation Index and has recorded 82% positive months.

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

Sean Webster
Research and Database Manager
Australian Fund Monitors

ATTACHED FILESOptimal Australia Absolute Trust AFM Fund Review December 2014 (pdf format)