Australia's regulator, ASIC, has lifted the limit on the covered short selling of financial stocks which was originally imposed on 21 September 2008 as part of the overall ban on short sales.

In reaching  the decision, ASIC noted that the global financial crisis and global recession continues to place pressure on Australia's markets', and that they 'will not hesitate to reimpose the ban immediately ... and without consultation if it considers market conditions warrant such action. ASIC will, in its monitoring of the market along with ASX, pay particular attention to short selling activity by participants (including activity by hedge funds and similar institutions) which could potentially harm Australia's financial system.ASIC also advised that the daily reporting of gross short sales would continue, as would the publication of aggregate short sale statistics the day after trading, until the commencement of the Government's permanant disclosure levels, which have yet to be announced.

The strong rebound in equity markets both in Australia and overseas saw Equity based hedge funds managed in Australia post not only their best returns this year, but for the past three years. When taking the results of all funds - including non equity strategies such as Global Macro and Commodities, and including funds of funds, it was the best result since the start of the Global Financial Crisis in late 2007.

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

ATTACHED FILESAFM March 2009 Performance Review (pdf format)

In a move that probably surprised no one just a week out from the Federal Government's budget due to be announced next Tuesday, the RBA has left rates on hold at 3.0 per cent.

In announcing the decision the RBA noted that although the economy both locally and globally has continued to contract in the first few months of the year, there are signs of stabilisation in several countries, and a pick up in China and in several commodity prices.

The announcement also noted the gradual improvement in global financial markets, with equity prices off their lows, term spreads declining and capital markets re-opening. Against this they noted a continuing fragility in confidence and ongoing pressure on balance sheets, along with tight credit markets.

The Bank sees inflation reasonably contained, with labour markets likely to weaken further, although imported goods are likely to balance this out somewhat given the weak exchange rate.

The Bank included their usual caveat that they will "continue to monitor how economic and financial conditions unfold..." when considering any further reductions in the cash rate are required.  Our guess is that there's not much room to move on the downside from here barring further major problems emerging from the GFC.

With just over 20% of single manager results to hand, early indicators are that performance from Australian absolute return funds in March was positive, although as might be expected, well below the stellar performance of the ASX200 and the S&P500 in the US.

Equity based funds reporting to date returned 2.61%, with non equity funds returning 0.86%.

Equity markets showed extreme volatility, as can be seen from the SPI futures contract which started the month by falling 8% only to promptly rally by 24% from the lows to close the month with a gain of 10%. Much of the rally was focused on just 8 stocks, with the big four banks, Macquarie and Wesfarmers, along with BHP and RIO, accounting for over 80% of the gains made in the ASX200.

Not surprisingly some equity based managers who have suffered in the bear market of 2008 produced excellent returns, with PM Capital’s Opportunities fund leading the pack with a return of 14.9% for the month, and Pengana’s Australian Equities long/short bringing home 7.60%. St Helen’s Arran fund returned 6.55%, bringing YTD to 9.44%, and 12 month performance to +3.35%.

As equity markets around the globe continued to be buffeted in February, Australia’s Absolute Return and Hedge Fund industry slipped into the red, collectively losing 1.6% for the month, and erasing January’s gains to be down 1.21% for the year to date, based on 78% of local funds returns.

Against this the S&P 500 index in America lost 10.99% in February to bring year-to-date losses to minus 18.62%, while on the local front the ASX 200 lost 5.54% to show a cumulative decline in the first two months of 2009 of 10.15%.

When put in perspective, 48% of the over 200 funds listed in Australian Fund Monitors index of hedge funds have produced a positive return in the first two months of 2009, with 84% of all funds outperforming the ASX 200.

The results, whilst not universally positive, again showed that in times of adversity hedge funds, far from being the speculative vehicles that they are frequently portrayed as, provided diversity and significantly better risk profiles than equities alone.

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

ATTACHED FILESAFM February performance review (pdf format)

Although there are still net outflows being reported by some Australian Hedge Funds, it appears that December was indeed the peak of redemptions, with one of Macquarie's funds reporting net inflows for the beginning of March for the first time since July last year.

Funds with offshore investors were hardest hit towards the end of 2008 as redemptions were based more on the investors' own liquidity and risk issues than on the underlying manager's performance - although those with particularly poor performance were punished accordingly. With the Madoff related issues hitting fund of funds - especially those with exposure to his 20 year Ponzi scheme - many both received and made record redemptions up to the 31 December deadline.

Further liquidity issues being faced by investors have continued in isolated cases in 2009 - with some of the best performing managers with positive returns over the course of the past year receiving redemptions from liquidity stressed investors.

Against this there are signs the corner has been turned. Macquarie Bank's MQ Asia fund reported net inflows in March following a horror stretch of outflows in the second half of 2008, and other funds are reporting positive signs that investors are returning from the sidelines. AFM are also noticing an increase in site visits and interest from offshore investors from both Asia, Europe and the USA.

After almost six months of investigations, Australia's corporate regulator ASIC has finally claimed a scalp - that of a 32 year old stockbroker, Richard Macphillamy, who emailed clients at the height of the market panic just 2 days after the collapse of Lehman's to warn of a run on Macquarie Bank's cash management trust (CMT).

The ban comes 12 months after ASIC announced Project Mint, designed to stamp out illegal market manipulation, and while they are themselves rumoured to be working on additional cases, there are some interesting aspects to the case.

ASIC stated that "in Macphillamy's favour is the fact that there is no evidence that he had any dishonest purpose or manipulative behaviour."  At the time, Lehmans had collapsed two days before, UBS had issued a downgrade on Macquarie a few weeks before, and JP Morgan issued a report the day after stating that Macquarie's model was "irretrievably broken."

No doubt the question will be asked in many brokers' offices what their job is, if not to inform clients about market "information"?  We suspect there will be a very fine line between information and rumour, and as John Durie of the Australian noted in today's edition "if the guy was just passing on the market gossip of the day, his penalty is too harsh - in fact you wonder why he was even hauled over the coals."

ASIC needs to find a party that has actually done what they are looking for - maliciously spreading rumours known to be false with the intent of profiting from the resultant price move.  And make sure it is enforced in both bull AND bear markets.

Australia's financial regulator, ASIC has decided to extend their ban on the short selling of financial stocks for the third time, making it the only country (with the exception of Holland) to maintain a ban on covered short selling.

Citing ongoing market volatility, and potential aggressive and predatory practices by short sellers, ASIC acknowledged that it was prepared allow the market to forgo some price discovery and market efficiency.

ASIC advised that it had discussed the situation with regulators elsewhere, but their decision (although not unexpected) is at odds with the actions of regulators in the US, UK and Hong Kong, who have all lifted the bans, or in the case of Hong Kong, not implemented a ban in the first place.

At ASIC's summer school held earlier this week, representatives of all three offshore regulators indicated that their bans were either no longer necessary, or in the case of Hong Kong, never required.

ASIC also advised it was remaining vigilant to conduct which allowed the ban to be circumvented, presumably referring to the use of derivative and arbitrage strategies. However, as there are widespread exemptions to the ban for market makers and option strategies, this seems to be contradictory.

ASIC's current reporting regime for the reporting only of gross short sales also remains in place, leaving the market no better informed as to the real extent of short selling taking place, and therefore allowing rumour and inuendo to continue.

Australia's Reserve Bank has held rates steady at 3.25% following the board's monthly meeting today, as widely anticipated.  RBA Govenor Glenn Stevens noted that in spite of the global economic crisis, Australia's economy had not experienced the downturn seen elsewhere and that changes to monetary and fiscal policy had changed sufficiently "on the basis of currently available information".  The full text of the Govenor's statement follows:

"At its meeting today, the Board decided to leave the cash rate unchanged at 3.25 per cent.

Recent data confirm that the world economy has remained very weak following the sharp decline in demand that occurred late last year. The major industrial economies reported large contractions in output in the December quarter, as did a number of emerging market economies across Asia and eastern Europe. Many countries are likely to be experiencing further falls in output in the current quarter.

Conditions in global credit markets have improved since November, but sentiment remains fragile. Share prices have weakened and banking systems in several major countries are still under pressure, as authorities work towards a resolution of the balance-sheet problems. Significant macroeconomic policy stimulus is being put in place around the world, but it is too soon to see the effects of those measures.

In Australia, demand has not weakened as much as in other countries and, on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere. The Australian financial system remains strong and the monetary policy transmission process is working to deliver large reductions in interest rates to end borrowers. Nonetheless, economic conditions are clearly weak, and given the speed and scale of the global economic deterioration and its effect on confidence, weak conditions are likely to continue in the near term. Inflation is likely to decline over time.

In response to that outlook, there has already been a major change in both monetary and fiscal policy. Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt-servicing burdens considerably. Together with the substantial fiscal initiatives, the cumulative decline in interest rates will provide significant support to domestic demand over the period ahead. On this basis, notwithstanding evident economic weakness at present, the Board judged that the stance of monetary policy was appropriate for the moment. The Board will consider the position again at its next meeting."

With the Australian ban on covered short selling of financial stocks due to expire by Friday 6th March, speculation is mounting that it will be extended further with ongoing weakness and volatility giving the ban's proponents additional ammunition.

David Murray, former CEO of the Commonwealth Bank, and now heading up the government's Future Fund, has been reported as supporting an extension of the ban. At the same time the Dutch regulator, AFM, has extended their ban on the shorting of financials until June after ING and Aegon came under renewed pressure.

The hard facts are that financial stocks in Australia have not been shown to have been protected by the ban while it has been in place. This leads detractors of the ban to claim that the ban is a populist knee jerk reaction which is damaging price discovery, (otherwise known as letting the market dictate the value of a stock) liquidity and Australia's reputation as a serious financial centre.

At the same time they point out that as there are significant exclusions to the ban (market makers, derivatives etc) it is not being even handed. We expect the debate to increase over the next week, and, whatever the regulator's decision, to leave one side or the other decidedly unhappy.