Welcome to the last edition of Hedge Clippings for 2012. It has been an eventful year here at AFM, but I guess when you're monitoring over 320 actively managed and absolute return funds that's always going to be the case.

First up, today we have released a new version of the Fund Monitors website. We hope you find it an improvement, but feel free to provide feedback (good or bad) and comments. If you're a previous user we suggest you press 'control + F5' on your keyboard to clear any cobwebs from the previous version. The new website will build and expand on coverage of fund performance and news feeds, including videos and research library.

Secondly, in October we launched an investable version of the E5 Equity Model Portfolio which we had used to track the performance of a small group of Australian actively managed equity funds. Over the previous five years the model portfolio had returned close to an annualised 15% with a volatility of less than 6%. Branded the AFM Prism Active Equity Fund, it is open to wholesale and sophisticated investors with a minimum investment of $250,000.

From a staffing perspective we welcomed a new administration manager (not my strongest suit), Alexis Scott who has transformed the office, but is still working on my time management. I think it's a case of the difficult we do at once, with the impossible taking a little longer. In January we look forward to welcoming a new Head of Research, and in February will launch the Prism Select Portal that will include selected research on 'best of breed' funds, with interactive online application functionality and reporting.

Meanwhile although there's still one month's data to come, year to date performance has ranged between great, good, ok, average, poor and unacceptable. All this does is confirm the diversity and range of funds, and skill of the various managers. YTD the best performing fund has returned investors 62% while the worst has fallen by -40%. In round terms just over 80% of funds have provided positive returns, while 30% have outperformed the ASX200.

Making it doubly difficult for investors is that many of the best performers have lifted their returns after a difficult few years, while some of the more disappointing had previously avoided risk in more troubled markets. Some, and we would argue the best, have provided the consistency of good risk adjusted returns year in and year out. Our 2012 Fund Review due out in late January will sort the wheat from the chaff.

And 2013 will probably see more of the same - a variety of performance and risk, no doubt with more new entrants and a few calling it a day. Life goes on, and we are eagerly looking forward to it. Maybe, hopefully, next year will see less political influence on the macro scene than the one just (almost) past.

And on that note I'd like to wish all readers compliments of the holiday season, and a happy, healthy and prosperous New Year.

Regards,

Chris.

Investors would be required to pass an online exam before investing in complex or risky products under a proposal by Greg Medcraft, the chairman of the Australian Securities and Investments Commission.

Medcraft told The Australian Financial Review he believes existing disclosure documents are no longer effective and new technology and innovative approaches are needed to protect investors.

Investors would be required to take "e-learning module" tests that could take up to two hours. The tests would examine investors' knowledge of financial products including margin loans, contracts for difference, derivatives and hybrid securities.

Potential investors could be shut out for 30 days if they failed the exam, which would have password protection to stop cheating.

"We have to start thinking about tools for investors which are not just disclosure," Medcraft told the newspaper.

"PDS [product disclosure documents] are not working for some [investors] and often it is not because they don't understand, they just don't have time. We are in a world where everyone is busy and I think we just have to start thinking more creatively."

The ASIC proposal follows the collapses of Banksia Securities, Trio Capital and MF Global, which hit many investors hard.

To read the entire article from Cara Waters at Smart Company.com.au, click here.

Or read this related article from Business Spectator here.

(Reuters) - U.S. asset manager Legg Mason Inc (LM.N) said on Thursday it will buy Fauchier Partners, one of London's oldest fund-of-hedge-funds firms, from BNP Paribas Investment Partners (BNPP.PA), the latest deal in the fast-consolidating sector.

Opalesque has revealed the number of new Hedge Fund launches declined and Fund liquidations increased in the third quarter. The number of single-manager Hedge Funds has increased to record levels whilst Fund of Hedge Fund numbers have fallen back to 2005 levels.

The squeeze on management and performance fees continued with the average management fee falling to 1.56% and the average performance fee falling to 18.62%. Ongoing pressures relating to increasing regulatory burdens, market uncertainty and competition have made conditions difficult for some managers; particularly given 51.85% of funds covered by Fund Monitors have been below their high water marks for 6 months or more as of October 31.

For full Opalesque article click here.

The following is an article from Citiwire Global and provides some interesting reading...

Fund: Marlborough Special Situations

Kicking off our top ten best performing managers over the last ten years is renowned UK equity manager Giles Hargreave.

The Citywire AAA-rated manager has been running the £496 million (€615 million) fund since 1998 and focuses on the UK's small cap equity sector.

The UK-domiciled fund currently has industrials as its top sector allocation, accounting for 30% of its assets, followed by consumer services (18%) and tech (16.4%).

His current top holdings are tech group Anite and industrial firms RPC Group and Ashtead Group.

Note: All performance data is over ten years to the end of October 2012 and in euro currency terms. Only managers who have been continuously running their fund over the last ten years and outperformed their benchmark according to the Citywire database were included in this analysis.

If you would like to read the entire artilce and view the Citiwire Global graphs, please click here.

Close to $1 billion dollars worth of new Australian equities mandates have been handed out by industry superannuation fund VicSuper as part of an investment overhaul.

AllianceBernstein, Perpetual, Tribeca Investment Partners, SG Hiscock and Vinva will now run actively managed Australian equities for VicSuper, which funded the new mandates by taking money away from passive Australia equities mandates run by BlackRock and the SSgA Australian SAM Sustainability Fund.

All the mandates are worth $165 million each, except Vinva's which is worth $330 million, and collectively they represent approximately 10% of VicSuper's total funds under management.

VicSuper only used BlackRock and the SSgA Australian SAM Sustainability Fund for its Australian equities investments and the decision to fund the new ones through a drawdown was not performance based, Oscar Fabian, VicSuper chief investment officer told Financial Standard.

"These new mandates had to be funded from somewhere. We didn't have a great deal of choice as there was only two," he said.

To read the entire article by Ben Collins at Financial Standard, please click here.

BLINK and you'd have missed it. Cautious investors have been cowering in cash while the more adventurous types have sought out high-yielding defensive stocks.

But in the past six months a change has taken place on the Australian stockmarket. Companies typically classified as cyclical, relying on a strong economy to increase earnings, have come to life and are rocketing higher.

The benchmark All Ordinaries Index has registered a 12 per cent gain since bottoming out in early June this year.

The high-yielding defensive darlings of the market continued to perform strongly in this period, with Telstra clocking up a 21 per cent capital gain, Commonwealth Bank rising 24 per cent, Westfield 15.9 per cent and Tatts 16 per cent.

LONDON—At least six hedge-fund firms announced plans to close in November and two more joined the list this week, underscoring the shakeout hitting the industry from uncertain markets, tighter regulation and what some fund managers say are investors with ever-shorter time horizons.

Some funds were hit by large requests from investors for cash, but others were just struggling to make money, fund managers and industry consultants say.

"If you look at the managers that have closed, there is not much commonality," said Michele Gesualdi, a fund manager at Kairos Partners, a fund of funds firm that invests in a range ...

To read the entire article from The Wall Street Journal, click here.

Report highlights the dangers of adopting a piecemeal rather than systematic response to changing compliance

Following a wave of regulations coming out of Europe and the US in the past two to three years, research into the Australian investment funds industry has found that local firms have limited awareness of the full impact of the regulatory reforms and that many are lagging behind their European and US contemporaries in adjusting to the new requirements. Furthermore, although the compliance changes have significantly increased the need for reporting, many firms continue to struggle with data that is distributed across multiple systems.

The findings are contained in 'Impact of Global Regulation on Australian Investment Managers', a research report based on interviews with senior executive management representing local investment funds firms.   The report was prepared by specialist investment management consultancy, Investit, and sponsored by SimCorp, a leading provider of investment management software and services for the global financial services industry.

Australia's fund management industry potentially stands to gain an influx of new investors under the government's recently announced Significant Investor Visa (SIV) program. The new Visa requires high net worth potential immigrants to invest a minimum of $5 million in a specific range of asset classes including ASIC approved managed funds which invest in Australian equities.

While the requirement that the funds specifically invest in Australian equities or other approved assets will limit some local absolute return managers, the opportunity for those that do qualify is significant. AFM understands there are a number of plans to market to the new investor/immigrant group which is expected to focus on China's high net worth demographic.

Administration of the program seems significantly simpler than many other government programs, and this will be welcomed by both the Visa holders and fund managers, particularly given the ongoing delay and lack of clarity about tax breaks for offshore investors in Australian managed funds announced following the Johnson report recommendations.

Emerging managers boosted by Volcker rule.

The ranks of Australian early-stage managers have been further boosted by a number of new funds in the past few months. Some of the new start-ups can be attributed to the ongoing implementation of the Volcker rule initially announced in January 2010 by President Obama and due to be implemented on 1 January 2013 in a crackdown on investment bank's proprietary trading and ownership of hedge funds.

While not all the new funds can be attributed to the new regulations, there are certainly some traders who have departed large global investment banks due to the new rules, including MST Capital, established by Gerard Satur (ex UBS) which has attracted over 100 million in seed capital from a local institution, and Auscap, founded by ex-Goldman prop traders Matthew Parker and Tim Carlton.

Emerging managers face a range of challenges in their early stages, as without a definable track record gaining new investors is difficult to overcome. What is apparent is that many of the new start-ups, including quantitative Asian equities manager Alpha Beta Capital founded by Andrew Barry, have established the necessary structure and processes to satisfy investors of their operational and risk management frameworks.

While gaining institutional investors in the early stages is particularly difficult, many family offices and high net worth investors understand and recognise that performance from early-stage managers is frequently significantly better than larger or more established competitors. The focus on due diligence compliance and institutional grade back-office systems has become a significant barrier to capital raising for early-stage managers, but this new breed and their focus on structure is welcome.

November returns

It's early days for returns from many managers for November, but in what has been described as a "tricky" month, most that we have seen have been positive. Politics continue to drive global headwinds, with the current challenge being negotiations of the fiscal cliff in the United States. China appears to have leveled out, while Australia's chances of avoiding a deficit seem unlikely.

Have a good week-end.

Regards,

Chris.