By: Australian Fund Monitors

Australia's Absolute Return & Hedge Funds continued to weather the storm in financial markets and outperform the broader equity benchmarks to the end of September, in spite of losing -8.68% on a year to date (YTD) basis. The ASX200 was down nearly 25% during this period, while the average September hedge fund return in AFM's database of over 200 funds was down -4.78% vs. the ASX200’s loss of 9.85%.

This year Hedge Funds have had to navigate the credit crisis and volatile markets, massive deleveraging and more recently the sharp selloff in commodity prices all of which have combined to see some funds to report significant negative returns. However, against that 24% of local funds have achieved a positive return year to date, and 19% were positive in September. 87% of funds in our database have outperformed the ASX200.

In addition Australian managers have also had to handle political and regulatory volatility, as the local regulator, ASIC, went well beyond their offshore counterparts by banning all short selling, and then reversing that decision with a series of amendments. Policy on the run has not made life easier for managers, or returns better for investors. Some semblance of clarity has returned with a new set of guidelines (mainly enforcing transparency of short positions) due to come into effect on 19th November, although short sales in Australia’s financial sector remain restricted until late January.

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By: Australian Fund Monitors

Everest Babcock & Brown (EBB) has released a statement in relation to media speculation around a possible sale of its hedge fund business. The Australian Financial Review had previously reported that an announcement on a sale was expected to be made within a month.

In the release, EBB stated: "As previously announced to the market, EBB continues to consider strategic partnerships with institutions and funds management businesses both in Australia and internationally. This process may result in the sale by existing shareholders of their holdings in EBB, or the full sale of EBB."

These discussions have progressed but there is no certainty that any agreement will be reached. We are therefore unable to comment on when or if any potential transactions will occur."

Australian Fund Monitors currently tracks the performance of nine (9) absolute return (or hedge) funds managed by EBB.

By: Australian Fund Monitors

The Reserve Bank issued the following statement at 14:30 AEST Tuesday 4th November:

"At its meeting today, the Board decided to reduce the cash rate by 75 basis points to 5.25 per cent, effective 5 November 2008.

World financial markets have remained turbulent over the past month. Global equity prices have been volatile and fell further in net terms, and there have been significant exchange rate movements, including a sharp depreciation of the Australian dollar.  A number of governments have announced measures to strengthen their financial systems, which should help to stabilise conditions over time.

International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well. These conditions have contributed to further falls in world commodity prices.

In Australia, the overall path of economic activity appears until recently to have been close to what the Board had expected, with a needed moderation in demand occurring after a period of earlier strength. Recent reductions in borrowing rates, the depreciation of the exchange rate and the fiscal stimulus announced in October will work to assist growth in the period ahead, but deteriorating international conditions and falling commodity prices will have a dampening influence. On balance, it appears likely that spending and activity will be weaker than earlier expected.

Consumer price inflation in Australia remained high in the September quarter. As expected, CPI inflation in year ended terms picked up to 5 per cent, while underlying measures were just over 4½ per cent.  Nonetheless, capacity pressures are now easing and, given the outlook for more moderate growth in demand and activity, it is reasonable to expect that inflation in Australia will soon start to fall. Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of inflation to the target could take longer than would otherwise be the case.

Weighing up these international and domestic developments, the Board judged that a further significant reduction in the cash rate was warranted. The Board will continue to monitor developments and make adjustments as needed to promote sustainable growth consistent with achieving the 2-3 per cent inflation target over time."

By: Australian Fund Monitors

ASIC has outlined requirements for short selling disclosures that will become effective from the 19 November 2008 when the ban on shorting non-financial securities is lifted.

ASIC said in their statement "the disclosure and reporting arrangements provide additional transparency on the amount of short selling in Australian securities to participants in financial markets, the market regulator (ASIC) and the market operator (ASX). ASIC and ASX will use this data together with information about trading and market positions in traded securities to assist in detecting market manipulation and other non-compliance with existing obligations."

Disclosure Requirements

Clients are required to inform a financial services licensee (i.e. their broker) when a sale order is for a short sale and trading participants are to ensure they have a system in place to record sell orders as follows:

1. Long Sale - a sell order from a client where they already own the securities;
2. Short Sale - a covered short sale (i.e. in non-financial securities); or
3. Exempt Short - a covered short sale which falls under one of the exemptions to the ban (e.g. a qualifying short sale in financial securities, a naked short sale arising from the exercise of exchange-traded options);

Obligations to report short sales that are otherwise allowable under sub-section 1020B(4) of the Corporations Act 2001 are unchanged.

Reporting

Trading participants will report to ASX each business day all short sales, including Exempt Short sales. Initially this will be a daily report submitted by 9:00am capturing all short sales executed up to 7:00pm on the previous trading day.

Market Disclosure

ASX will produce and disseminate a report to the market that will be released after 9:00am each trading day. The report will show, by security, the total volume of short sales executed on the previous trading day. The report will include Exempt Short sales in financial sector securities.

By: Australian Fund Monitors

Everest Babcock & Brown (EBB) has suspended redemptions in its Income Fund and is reviewing its other wholesale funds in light of redemption requests from investors and the impact of the global financial crisis.

The EBB Income Fund (EBBIF) is yet to report September results but the YTD return as at August was negative 0.20%.

EBBIF was established to invest in high yielding, reasonably predictable, income producing investments and securities. The investment objective is to provide net pre-tax income returns in the order of 10% per annum which may be complemented by longer term capital appreciation. Investments are predominantly sourced from, but not limited to, Babcock & Brown deal flow.

EBB Statement

Everest Capital (ECL), a wholly owned subsidiary of Everest Babcock & Brown (EBB), is the responsible entity, trustee and/or manager of 18 wholesale funds with differing investment objectives and strategies. A review is currently being undertaken of each of these funds to assess the impact of the current adverse market conditions and redemption requests upon the ongoing conduct of these funds. No decisions have been made with respect to any fund other than as set out below. EBB will keep the market informed as and when decisions are made that are relevant for EBB investors.

In its capacity as responsible entity of the unlisted wholesale Everest Babcock & Brown Income Fund (EBBIF or the Fund), ECL has informed EBB of its decision to suspend redemptions of units in EBBIF with effect as at the close of business yesterday until further notice. EBBIF currently accounts for approximately $180 million in funds under management.

The decision to suspend redemptions was made by ECL, recognising the adverse impact the current market conditions have on EBBIF’s portfolio of subordinated debt investments and the impact of a large number of redemption requests.

The ECL Board has advised EBBIF investors that it is in the process of reviewing the ongoing operation of the Fund. This review includes the consideration of possible termination of the Fund and of incremental pro-rata cash distributions to unitholders as investments are progressively realised. It is expected that unitholders will be informed about the outcome of the review process in the next few weeks.

By: Australian Fund Monitors

Feedback from two recent hedge fund conferences, one in Hong Kong and one in Sydney, have confirmed that the next three months will create significant challenges for hedge fund managers around the world.

As a result of the crisis in all financial markets, and the damage done to corporate balance sheets around the world, there has been widespread deleveraging as investors, banks, investment banks and other financial institutions rush to get their balance sheets in order, and reduce debt wherever possible. One keynote speaker at the AsiaHedge conference in Hong Kong last week claimed that investment banks had increased their leverage over the past few years from a factor of 10 times to over 40 times. This was now in the process of being unwound. In addition many of those investment banks operate (or operated) prime broking facilities for hedge funds, which also included leverage of up to 5 to 10 times for the underlying funds in some instances .

Many hedge funds and fund of funds, especially the large ones based in the US and Europe, operate with 12 month lock-ups to 31 December each year, and also require 90 days notice for redemptions. Those redemption notices will have hit at the end of September and reports are coming through which indicate that possibly 25% or more of investors' funds might be recalled either through necessity or in order to reallocate to other managers or strategies.

Very few of these have been made public as yet, and it is unlikely that too many managers will want to publicise the fact for fear of triggering additional redemptions from other investors. However it is more than likely that some managers will invoke the gate clauses in their management agreements, and halt redemptions come 31st of December or otherwise face the prospect of closing the shop.

In any event the de-leveraging that has been such a powerful downward force in equity markets over the past 3 to 6 months is likely to continue. Hedge fund selling to meet redemptions will add to the downward pressure and certainly create some headlines in the media.

By: Australian Fund Monitors

ASIC has extended the ban on covered short selling for non-financial securities until 18 Novemeber 2008 while the ban on covered short selling for financial securities is expected to remain in place until 27 January 2009.

Full ASIC Statement

ASIC today said it would extend the ban on covered short selling for non-financial securities for a further 28 days until 18 November 2008, when it expected the ban would be lifted.

In its announcement of 21 September ASIC said that the ban on covered short selling for non-financial stocks would be reviewed in 30 days. In the case of financial stocks, ASIC said that its review would be in line with time limits imposed by other international regulators.

Following the 30 day review, ASIC has decided to maintain the ban on covered short sales for non-financial stocks until 18 November 2008. ASIC expects to lift the ban from opening of trading the next day.

The ban on financial stocks will continue until 27 January 2009, and while the US has lifted its bans, other jurisdictions such as the UK are maintaining bans on financial stocks.

ASIC Chairman, Tony D'Aloisio, said market conditions since the bans were imposed remained difficult. "While the various Government actions and packages introduced in Australia and overseas are positive developments, they are yet to work through the financial system. The financial markets are still fragile, so we feel the reopening of covered short sales should be done in stages and in a measured way over an extended period and have regard to systemic issues, particularly for financial stocks."

Key changes

In summary:

1. The ban on financials will continue until 27 January 2009. For the purposes of the Australian market, ASIC has taken a pragmatic approach to the definition of financials as entities in the S&P/ASX 200 Financial Index (which will include property trusts and five other APRA supervised listed entities not in this index).



2. ASIC expects to lift the ban on non financials from opening trade on 19 November 2008. ASIC cannot, however, provide greater certainty than that because of the state of the markets.



3. As part of lifting the ban on non-financials, ASIC with ASX have been putting in place disclosure and reporting arrangements that will apply from the time the ban is lifted. These will be announced to the market later this week.

For clarity, no changes have been made to the exemptions and facilitations which ASIC has granted. In short, all current arrangements will continue.

ASIC will, at least three trading days before 18 November 2008, issue a further release on its expectation of lifting the ban on non-financials.

By: Australian Fund Monitors

As expected initial September performance reports from Australia's Absolute Return and Hedge Fund sector are showing considerable diversification. However given the significant volatility across a range of underlying financial markets and asset classes, plus the ban on short selling equities, there have been some positive results.

Best results to date (as of 7th October) include Blue Fin Capital’s Currency/FX with 9% (5.83% YTD); Apeiron Global Macro’s +7.22% (+13.55% YTD); TechInvest's market neutral Intercept Capital Fund +3.44% (+11.97% YTD); Commodity Strategies’ long/short fund +3.27% (+11.9% YTD) and Wallace Funds Management’s equity market neutral +0.85% (+29.73% YTD).

On the negative side Plato Investment Management’s Equity 130/30 was down over 12% (-27.48% YTD) reflecting the problems experienced in the equity sector and the ban on short selling.

By: Australian Fund Monitors

Australia's Reserve Bank (RBA) exceeded market expectations by cutting rates by a full percentage point, to 6.00%, double the 50 basis points that the market was expecting.

Citing weakening economic activity in major economies, and evidence of moderation in growth in Australia's trading partners in Asia as indications that global inflation will moderate in 2009, the Board chose to ignore their expectations of a CPI figure of around 5% for the year to September, and introduce an unusually large movements in the cash rate to bring about a significant reduction in costs to borrowers.

However the RBA's statement was careful to point out that it did not expect this movement to establish a pattern for future decisions, and that they were all continue to set monetary policy as needed to bring inflation back to the 2 to 3% target over time.

By: Australian Fund Monitors

Australia's Absolute Return & Hedge Funds continued to weather the storm in financial markets and outperform the broader equity benchmarks on a year to date (YTD) basis to the end of August. The ASX200 was down over 27% over this period, while the average hedge fund return in AFM's database of over 200 funds was down 4.16%.

To date approximately 90% of all funds surveyed by Australian Fund Monitors have reported August results and the average return for the month was +0.90% against a rise of +3.08% for the ASX200 and +1.20% for the S&P500. During the month 55% of funds achieved a positive return after fees with 30% outperforming the ASX200.

It has been a turbulent year in the industry across all strategies with most funds finding it hard to avoid at least one negative month. The best performing strategies continue to be non-equity based, including Commodities, FX, Global Macro and Futures. However, Commodity strategies have been retracing in recent months while Equity Market Neutral funds continue to perform well. The only fund manager to achieve a positive result every month since January is Fortitude Capital (AIMA Hedge Fund of the Year 2008) implementing an equity market neutral strategy.

To read the full report download the file below.