Questions for Astarra and AIOFP

The Astarra/Trio debacle continues although claim and counterclaim seems to be adding to the overall confusion, and no doubt distress, of their hapless investors.  This seems to be extraordinarily complicated, with more twists, turns, offshore entities and faceless people than a paperback thriller and all seemingly being played out in the media, and not as yet in the courts - although the case is due back there on March 23rd and 24th.

For those not aware, the Astarra Strategic Fund was an Australian based Fund of Funds and had approximately A$120m reportedly invested both local and offshore underlying managers.  The Strategic Fund was part of the Trio group of companies.

When concerns about the whereabouts or security of the underlying investments were raised last October, ASIC stepped in and froze all of Astarra's/Trio's funds and assets.  The Astarra Strategic Fund's manager, Shawn Richard, has assured the media he's confident the assets of the Strategic Fund will be recovered, but seems unable, or unwilling, to provide details exactly where or with which underlying managers they were invested with, or what the current status is.

It appears that the funds were allocated to a third (possibly related) party offshore who was then responsible for allocating to underlying funds.

Meanwhile it appears that the main distribution channel for the Astarra Strategic Fund was the AIOFP, (Association of Independently Owned Financial Planners) and there have been reports and allegations relating to both the relationship, and commissions or other incentives that may have existed between the Astarra and some of AIOFP's members. 

It was also reported last week in the trade press that the chairman of AIOFP's so called Independent Research Committee, Rob McGregor, was also a consultant to Astarra.

This sounds like a significant conflict of interest.

As initially observed, details are limited at this stage, but the situation certainly looks murky to say the least.  However leaving the legal details aside for the lawyers to ponder, there seem to be some basic and straight forward issues, and questions to be asked.

For a fund of funds to invest offshore in underlying single funds is not out of the ordinary as that is exactly what most of them do quite legitimately.

However, for a Fund of Fund manager to invest via a third party, and presumably not to have done his own due diligence on the underlying managers or not to know the exact and detailed knowledge of the funds is simply unforgivable.

Everyone is asking where the missing portion of the funds are, and no one really seems to know, although to be fair some has been invested in local, reputable managers to our knowledge.

But the questions we'd like to ask, and have answered are:

1.    Fund of funds charge an extra layer of fees, supposedly for researching and selecting underlying managers, and then monitoring them on behalf of their investors.  Why then can't the underlying funds be traced and valued immediately?

2.    Did Shawn Richards or any other senior person at Astarra do proper, or any, due diligence on the underlying managers with whom the funds were invested, and what ongoing reporting, checks and controls were in place?  

3.    Alternatively did they just hand the investors money over to a third or related party offshore to invest as they sought fit in various underlying managers, and if so, WHY?

4.    What was the relationship between the AIOFP, Astarra and their common consultant, Rob McGregor, and did he complete full and proper due diligence on the Astarra Strategic Fund on behalf of the AIOFP?

We'd love to get a response, even if we don't like the answers.

Volatility returned to global markets in January, as President Obama foreshadowed controls on banks' prop trading activities and ownership of hedge funds, China issued a warning on credit growth, and Greece shook the confidence of markets with revelations of massive sovereign debt problems.

Markets around the world, including equities and commodities took note, with Australia affected to a greater degree than most. Local hedge fund managers were not immune, and AFM's index of over 200 funds managed from Australia recorded their first decline since February 2009 with an average loss of -1.43%.

For detailed analysis of performance for each strategy, industry comment and ranking tables, please open the attached .pdf file.

ATTACHED FILESFebruary absolute return and hedge fund review (pdf format)

Australian Fund Monitors has just released the November Absolute Return and Hedge Fund Review. Australian absolute return and hedge funds, like their overseas counterparts, enjoyed one of their best performances on record in 2009. Single funds across all strategies returned 20.81% for their investors after all fees as equity markets rebounded sharply from the selloff of 2008 and early 2009.

We also cover the performance of three Model Portfolio's which highlight some of the best funds in our database.  Each of these portfolios has a three year annualised performance of over 17% with a volatility of less than 6%, and begs the question "why is there still a reluctance to increase research, allocations and investments to managers such as these?".

For detailed analysis of performance for each strategy, industry comment and ranking tables, please open the attached .pdf file.

ATTACHED FILES2009 absolute return and hedge fund review (pdf format)

Australia's Reserve Bank defied the market's and most economists' predictions by leaving official interest rates on hold (at 3.75%) at today's monthly RBA board meeting.

The widely held view was that the RBA would increase rates for the fourth time in as many meetings (the RBA board meets on the first Tuesday of each month with the exception of January). However, had they done so, it would have been unprecedented for them to move rates upwards at four successive meetings.

In the Bank's statement RBA Governor Glenn Stevens noted the unexpected strength of the local economy compared with conditions just 12 months ago, but against this cited the removal of the government's fiscal stimulus, and the fact that banks have already increased rates to borrowers by almost 1% more than the 0.75% increase in official rates since October 2009.

However, the final paragraph of the Bank's statement was clear in pointing out that rates remained lower than historical averages, and that if economic conditions continue to evolve as expected, monetary policy will need to be adjusted further to ensure inflation remains consistent with the target over the medium term.

In other words, borrowers can probably only breathe more easily for a month or two at the most.

Australian Fund Monitors has just released the November Absolute Return and Hedge Fund Review. Results for October were generally flat, but this still represents outperformance of around 2% when compared with equity markets.

This month we've taken a look at the "best of the best" equity funds to come up with a Model Portfolio. The results show an impressive performance: A portfolio of 10 locally managed and domiciled equity funds with an annualised return of 14.43%, a standard deviation of just 5.53%, a Sharpe ratio of 1.45 and a maximum drawdown of -5.65%.

Over the same three year period the ASX200 returned a negative -3.32%, a drawdown of over 50% at one stage, a negative Sharpe ratio, and volatility of over 17%.

For detailed analysis of performance for each strategy, industry comment and ranking tables, please open the attached .pdf file.

ATTACHED FILESNovember absolute return and hedge fund review (pdf format)

Better performance, half the volatility. Why the bad name?

What a difference a year makes! Or maybe that should be half a year?

A little over six months ago the financial world as we knew it was in disarray, and with it, equity markets. And, according to some loud and strident voices, hedge funds were, if not to blame, well....at least a great target.

Come September and the rally continued, with the ASX recording a gain of over 5% for the fifth time in seven months, and the average performance of Australia's hedge funds tagged along for the ride with AFM's index rising 2.34%. However, behind the headline statistic there were some standout performances, even if some of September's stars were playing catch up after a forgettable 2008.

For detailed analysis of performance for each strategy, industry comment and ranking tables, please open the attached .pdf file.

ATTACHED FILESOctober absolute return and hedge fund review (pdf format)

The Australian Securities and Investments Commission (ASIC) issued an urgent stop order forcing Trio Capital, formerly Astarra Capital, to remove the product disclosure statements for its Astarra managed funds from its website, according to a report in the Sydney Morning Herald.

However there are scant details available, as ASIC have been barred from releasing details of charges laid in the New South Wales Supreme Court against two directors of one of the funds involved.

Further confusion arises in what seems to be a complex corporate structure of related entities between Astarra and Trio.

The Sydney Morning Herald has reported on the potential for ASIC to ban products considered "unsuitable" being distributed to retail investors.

Quoting the chairman of ASIC, Tony D'Aloisio from a speech he delivered last week, in addition ASIC's submission to the parliamentary committee investigating the financial industry, the paper reported that ASIC had concerns that the current consumer safeguards of education and improved disclosure were not necessarily providing protection for all consumers.

The change to ASIC's stance comes after concerns following a series of issues where products have been allowed to be sold to retail investors because they conformed to the risk disclosure regulations, without really considering the suitability of the product for the individual investor.

ASIC has also recently been active (and successful) in prosecuting financial advisors who had recommended clients invest in products which subsequently failed.

Click here to view the full article.

The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, has released draft regulations and commentary material in relation to the disclosure of short selling information under the Corporations Amendment (Short Selling) Act.

The new regulations maintain the existing requirement for sellers to advise the broker when placing an order for a short sale, for the broker to advise the ASX of all short sales transacted for each stock the same day, and for the ASX to publish the information by 0930 the following morning.  This will be known as Transactional Reporting which has previously been criticised for not showing net short positions.

Added to this will be a new level of reporting to be known as Positional Reporting, to come into effect on 1 April 2010.  Under this regulation each seller will be required to advise ASIC of each short position they hold within three days of taking that position, and each day thereafter that the position remains short.  ASIC will in turn aggregate this information and publish net short positions the following morning.

The Minister has called for submissions from interested parties on the new regulations, with a closing date of Friday 23rd October.

The Cumulative Performance chart on page 1 starkly illustrates the role of absolute return strategies in reducing the volatility of equity markets. Like insurance, the cost of the "hedge" to protect large down side moves will inevitably have a negative effect in strong bull markets.

Over the past few years, and prior to 2008, some funds' solution to that problem was leverage. Sadly, leverage can have dangerous results in sharply falling markets in the wrong hands.

For detailed analysis of performance for each strategy, industry comment and ranking tables, please open the attached .pdf file.

ATTACHED FILESSeptember absolute return and hedge fund review (pdf format)