October was another difficult month for Australia's Absolute Return and Hedge Fund sector with widespread deleveraging across the globe and across almost every investor group and asset class.

The average October return of single managers across the sector was negative 5.04% with 86% of single managers’ funds having reported to date. This made October the worst month this year for the sector. On a year-to-date (YTD) cumulative basis the performance of the average Absolute Return fund in the database is negative 12.30%.

Positive returns were achieved by 28% of the sector while 81% of the sector outperformed the benchmark S&P/ASX200 Accumulation Index. The ASX200 fell 12.61% for the month, and according to Mercer Investment Consulting the median Long Only fund lost 11.3% in October, and 35.7% over the past 12 months.

To read the full report download the file below.

Wallace Absolute Return Limited, an ASX Listed Investment Company (LIC) recorded a negative return of -2.47% for October, bringing 12 month performance to -18%.

Meanwhile the Wallace Australia Opportunities Fund, a Cayman based unlisted fund using broadly the same Equity Market Neutral strategy, returned a positive 8.15% and 36% over the past 12 months.

The Asia-Pacific Asset Management Asia fund returned 18.21% in October to take year-to-date performance to +11.69%.

The manager noted in their monthly report that they made gains on the currency through an active hedge strategy although the underlying managers in the fund had also performed well in difficult conditions during October.

Meanwhile the Asia-Pacific Asset Management Australian Fund returned -0.77% for the month and -5.03% year-to-date.

Both funds are open to retail investors in Australia.

Kenny Arnott's Arnott Opportunities Fund, an Equity Long Short fund investing primarily in Pan Asia, returned 0.34% in October, bringing YTD performance to +4.35%.

Arnott's October performance report indicated a move towards risk free arbitrage deals during the month as a method of navigating successfully through current markets. They also noted that there was a reduction in competitive activity from both other funds, and also from investment bank's proprietary desks, which have been winding leverage back from up to 50 times to a more manageable 10 to 20 times.

The Arnott Opportunity Fund has US$780m in funds under management and was established in November 2005.

Eclectic Capital Management, a Melbourne based Equity Long/Short manager established in 1999 has closed as at the end of September,and returned all funds to investors.

Eclectic's performance to the end of September was -4.2% YTD, well above the benchmark of the ASX200, and broadly in line with the AFM Hedge Fund Index. However, Eclectic's August performance report noted that "investing in this market is like driving a land cruiser down the Nullabor and hitting rumble strips. You can get through but it's not much fun, and it's not good on the nerves."

AMP Capital's Total Return Fund, a leveraged, Multi Strategy, Global Fund of Funds with $979 million in funds under management, returned -13.21% in October, bringing 2008 YTD performance to -18.61%.

The Manager reported that the majority of underlying strategies in the fund experienced losses in October due in part to continued liquidation occurring in hedge funds globally. In particular managers in the leveraged loan market, distressed, special situations and macro strategies all contributed to the losses. On the positive side were commodity strategies and some sector specialist funds.

AMP reported they were reducing exposures to various strategies to lower risk, whilst also noting that they have adjusted their Australian dollar hedge position to act as a buffer against negative manager performance.

The BlackRock Asset Allocation Alpha Fund returned 8.17% to investors in October, continuing what has been a successful year to date, returning over 30%.

The fund which was formerly known as the Merrill Lynch Asset Allocation Alpha Fund, noted positive influences on performance included bonds/cash, currencies and equities, reflecting the long US large cap versus US small cap, and long US growth versus US value.

Looking forward, the manager noted that there is now a risk that the global economy faces deflation in the next 12 to 24 months on the heels of a severe global recession. They also noted that equity markets usually reached their lows 3 to 6 months before the end of the recession, and with their negative view in that regard, feel that it is likely to be still too early to buy.

The average October return of Absolute Return funds in AFM's database stands at negative 4.32% with 61% of funds having reported to date. Of all funds so far reported 31% have achieved positive returns while 86% have outperformed the S&P/ASX200 Accumulation Index during October.

The non equity based strategies of Global Macro, Commodities, Currencies and Managed Futures averaged positive returns for October, while the equity based strategy of Equity Market Neutral also averaged a small positive gain. On a year-to-date basis Commodities remains the best performing strategy on average.

At an individual fund level, the best result reported to date has been Argus Capital Management Pty Limited with their Dynamic Multi-Strategy Program returning 11.77% in commodities. Fortitude Capital continues it's unequalled record of positive returns every month this year achieving 3.12% for October in it Absolute Return Trust using an equity market neutral strategy.

Blue Fin Capital, an Australian quantitative investment manager specialising in trading spot foreign exchange and commodity futures markets, has reported a positive return of +1.12% for October, bringing year-to-date returns to 10.62%.

Performance attribution for October was positive 0.05%for soft commodities, +1.62% for metals and +0.24% for energy. Grains lost -0.79%.

Blue Fin Capital's managed commodities account was established in April 2007.

The Reserve Bank of Australia released the minutes of its most recent board meeting held on November 4, at which they handed down the decision to cut official rates by 0.75% to 5.25%.

The five pages of minutes made for gloomy reading, with hardly any positive indicators noted either in Australia or overseas. As such it was hardly any wonder that the board cut rates by 75 bps -- maybe the real surprise was that they didn't go further.

All eyes will now be on the Reserve's next meeting due to be held on Tuesday, December 2. As the Board does not usually meet in January, they will need to make a decision then to carry through Christmas and the January holiday period.

No one in the market will be surprised to see a further 75 bps, or even a full 1% cut at that stage, given that the outlook described in the board's minutes does not seem to be improving.