Dysfunctional Markets sorting the hedge fund wheat from the chaff.

The dysfunctional markets of 2011 (or should that be four years?) are making it difficult to provide investors with absolute returns. However over 50% of Australian Hedge Funds have provided a positive return over the past 12 months, demonstrating that investors should be increasing their allocation to hedge funds in 2012 - provided they invested in the right 50%. 

Meanwhile only 10% of the 270 funds in AFM's database have under perfomed the fall in the ASX200 of 10.13% over the 12 months to the end of November. Depending on how far down the list they sit, the other 50% of managers might see redemption notices rather than greeting cards in the mail this year.

With the ASX200 racking up its seventh losing month this year, and only one positive month in the last eight, the market's direction has frequently seemed as random as the toss of a coin. It is a true test of investment and risk skills to produce a positive return when the market has fallen over 13% year to date.

On that note we are pleased to see that AFM's Model Portfolio of five Australian equity funds returned +1.90% for November for a 12 month return of 18.47%, certainly vindicating their inclusion in the best of breed category.  Annualised returns from this portfolio over the past five years now stand at 16.84% with a volatility of just 5.76%

However, if there's one thing these markets are doing, it's sorting the wheat from the chaff when it comes to manager selection.  From that perspective we expect that 2011 will be a pivotal year for the industry in Australia and overseas.  Managers who have proven they can provide positive returns - particulary those who have consistently done so - across all market conditions should find themselves in high demand.

Given the typically boutique structure of the industry, and the general reluctance of the larger superannuation funds to allocate to local absolute return managers, it will be the Self Managed (SMSF) sector and Family Offices which are most likely to benefit. 

On a different note it was pleasing to see the announcement by the Australian Government confirming that foreign based funds investing in Australian managers would no longer be subject to tax on profits from capital gains.  This has the potential to significantly lift the interest of offshore investors, and inflows into local managers.

For details on all funds in AFM's database see www.fundmonitors.com.  Meanwhile we wish all our members and subscribers a happy and healthy festive season, and best wishes for a healthy, happy and prosperous New Year.

Regards,

Chris Gosselin