In this issue:

• New website
• 2012 Fund Results
• Japanese End Game
• Performance Fees
• Shaken not Stirred

We're back after the Christmas & New Year break - greatly and gratefully refreshed, and relishing the challenges and opportunities of 2013. The break wasn't all sun, sand and swimming though. Those of you who have visited our new website over the past few weeks will have noticed significant changes, including a new look and feel with additional content and free access to the Fund Selector, Fund Profiles News and the Library. Feedback from users has been positive, but further suggestions or comments are always welcome.

Looking back, 2012 was dominated by macro risks combined with politics and politicians - never a good mix. However the immediate threats to Europe were resolved by the "whatever it takes" approach, the US stepped back from the fiscal cliff and there does seem to be a recovery of sorts underway, and China appears to have avoided the hard landing scenario many were fearing.

Australia's equity gained 14.6% in 2012, and 20.2% on an accumulation basis with most of the gains coming in the final six months of the year as global risks subsided and interest rates fell to historical lows, leading to a search for yield which resulted in the big four banks and Telstra gain 30 to 40%, while the materials sector struggled. In this environment equity based hedge funds averaged gains of 12.18% with the best performing fund returning over 50% and the worst falling more than 40%. Manager and fund selection remains vital!

It seems unsurprising therefore that markets are experiencing a definite change to "risk on" based on feedback from a range of fund managers and investors. However that doesn't mean there aren't significant risks remaining, as some of the issues have just been deferred. Concerns remain in Australia that the price side of the P/E ratios have moved and there may be some delay in earnings. Another risk on the horizon seems to be the advent of the currency wars as the US, Europe and now Japan all compete to drive their currencies lower.

This article from macro manager Blue Sky Apeiron outlines their views on the possible outcomes and dangers that Japan's new policies are creating. Interesting and sobering, and if their suspected scenario comes to pass Australia will feel the effects given Japan's position of our second largest trading partner.

Elsewhere one of the major challenges the absolute return sector faces is the necessity to provide value in return for the fees charged. Downward pressure on fees continue, but this article in AFM's "Understanding Hedge Funds" series argues that it is not merely the size of the fees but the way they're structured that will come under scrutiny. We remain firmly of the view that paying high fees for the best managers is a sound investment, and paying fees for poor performance should lead to a change of manager.

And now for something completely different. Personally I have never enjoyed drinking exotic cocktails, but seeing the skills involved in making them might be a different matter - even in Russia.

Have a good week-end.

Regards,

Chris.

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.