The Kapsteam Absolute Return Income Fund was up +0.94% in January (+7.75% since January 2008). In their monthly commentary piece, Kapstream Capital discusses why bonds were not able to protect investors from losses in 2008.

Kapstream attributes the poor performance of bonds in the volatile markets of 2008 to fund managers, attempting to outperform their benchmarks, investing in higher risk instruments in the pursuit of higher yields from 2006 onwards. Bonds rated at BBB or higher were trading only 30-50 basis points above government bonds, while new products such as CDO's and CLO's were introduced, allowing managers to continue producing the high excess returns that they and investors were used to. Managers also either used cheap leverage or invested in lower quality bonds, or both, to increase returns. Once the markets began to reprice risk to more realistic levels in 2007 and 2008 these returns abruptly stopped.

As a result only bond managers that invested only in government bonds performed well in 2008, although the returns they achieved are unlikely to be repeated in 2009, due to lower interest rates and government intervention in the market.

The Commodity Strategies Long Only Fund, which returned an impressive +10.47% in 2008, was up +0.53% for January, outperforming its benchmark (the Reuters/Jefferies CRB Total Return Index) by +4.52%.

The Commodity Strategies Long Short Fund, which also performed strongly in 2008 (up +22.28%), recorded its fifth consecutive month of positive returns in Janaury, up +1.52%.

The Long Only Fund's January result was attributed to gains in silver, platinum and gold strategies, partially offset by losses in nickel. The Long Short Fund recorded both its largest gains and greatest losses in energy commodities, with gains in crude oil and natural gas offset by losses in RBOB gasoline.

K2 Asset Management's Peak Asian Absolute Return Fund ended January down -4.95%, while the K2 Asian Absolute Return Fund was down -3.32%.

These results reflect the poor performance of Asian markets during January, with Hong Kong-listed China stocks down -9.6%, and the Hong Kong and Taiwanese markets down -7.7% and -7.5% respectively. Given the ongoing volatility in Asian markets the manager reduced net exposure for both Funds in January, particularly in Hong Kong, China and Australia, although exposure to Singapore was increased, after it recorded a gain of +0.6% in January.

K2's other funds, the Australian Absolute Return Fund and the Select International Absolute Return Fund, were down -1.65% and -3.09% respectively in January.

AR Capital Management's Ascot Fund was down -0.18% overall in January, after recording a -0.5% loss on the Fund's PXUPA (Paperlinx Step Up Prefs) position.

This individual result offset positive performance from shorts in Boral, Harvey Norman and Sigma Pharmaceuticals amongst others, although the Fund also experienced negative returns from shorts in Caltex and Incitec Pivot and long positions in SPI futures and Oil Search. These results produced an overall return of approximately +0.35% for the Fund. For the month of January the Fund outperformed the market (ASX200), which returned -4.88%.

Blue Fin Capital's Managed FX Account recorded a gain of +3.11% in January, after ending 2008 up +8.75%, while the Blue Fin Managed Commodities Account was down -1.04% in January (up +11.43% in 2008).

The Managed FX Account, a quantitative model that uses short term momentum based trading in spot FX markets, enjoyed gains across most currencies in January to begin 2009 on a positive note after a strong 2008. However it should be noted that, taking into account there were no funds in the account from October to December, the real 2008 result was +5.83%. The Managed Commodities Account recorded gains in metals, which was offset however by losses in grains, soft and energy commodities.

Tactical Global Management Group's GTAA Fund gained a healthy 1.68% in January. However the manager remains cautious, saying that too much risk remains in taking positions at the asset-class level.

Performance was driven by short positions in equities in Japan where the market fell by almost 10% in the month, as well as short exposure to US and Australian stocks. Detracting from the result were a long exposure to UK and Australian bonds which were only partially offset by long exposure to US bonds. On the currency front the manager decided not to participate as data indicated that all currencies are close to being fairly valued.

Looking ahead TGA says thaty it expects European equities will outperform due to a relatively favourable profit outlook and positive valuation.

All three of Plato Asset Management's funds lost a little over 40% during 2008 and have kicked off 2009 with further losses. The Market Neutral Fund may have turned the corner however, down only 0.93% for the month, compared with the 4.4% loss for the 130/30 Fund and the 4.33% loss in the Core Composite Fund which runs a long only strategy.

Plato runs a quantitative system which uses a combination of value, momentum and quality factors aimed at taking advantage of market inefficiencies.

Pengana Capital's Emerging Companies Fund, which invests in small Australian listed companies, reported a loss of -1.9% in January while its benchmark (the S&P/ASX Small Industrials Accumulation Index) was down -5.3%.

The manager noted that market conditions remained volatile and economic conditions uncertain in January, although there were some positive signs in global credit markets. As a result the Fund remained defensively positioned during the month, though gains were recorded in positions in Duet Group (+23%) and Webjet (+10%) among others. Much uncertainty remains in general economic and earnings outlooks, so the Fund will remain cautious in the short term.

The MM&E Capital Takeover Target Fund was down -1.40% in January after ending 2008 down -30.84%.

The Fund remained heavily invested in cash for the month, although new postions in Tabcorp and Santos were entered while positions on Bank of Queensland and Origin Energy were exited. This enabled the Fund to outperform the ASX200 for the month (-4.88%). The manager expects the Fund to become more active in the market after the upcoming interim reporting season is over.

Regal’s Amazon Market Neutral fund has made a welcome return to positive territory following a tough six months in the second half of 2008. The manager has reported a positive 4.89% for January 2009, with their short book proving the benefit of hedging by contributing 6%, whilst their long positions lost 1%. Against this, the ASX was down almost 5% for the month.

Regal’s MD, Andrew King noted that they expect ongoing opportunities on the short side as profit warnings in the reporting season and capital raisings accelerate.

Regal’s Amazon recorded a one year rolling return of -4.78% and a 2008 return of -8.25%, with the majority of the negative performance coming in the second half after a strong first six months when they returned over 15%. Annualised returns since inception in September 2005 are 21.32%. Funds under management in the Cayman based offshore fund was US$43m.