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.

By: Australian Fund Monitors

Everest Babcock & Brown Alternative Investment Trust (EIB) plans to delist from the ASX to address EBI's trading discount to NTA which is currently 33%. EBI is a fund of hedge funds and has exposure to a portfolio of international absolute return funds and selected direct investments.

The proposal is to be voted on by its security holders on October 3 and EBI plans to put in place redemption facilities ahead of and after its de-listing.

EBI Chairman, Trevor Gerber said: "The trading discount to NTA is an issue of concern to many listed investment vehicles in the market today. The Board has been looking at potential solutions for some time and in developing our proposal we have been mindful to balance the needs of Unitholders who would like reasonable levels of liquidity in the short term, with those of investors who have invested for the longer term, by ensuring the value of the underlying investments are not compromised.

The proposal allows Unitholders who wish to exit to progressively redeem from EBI at a price closer to the underlying value of their units."

To view EIB's statement to the ASX click here or to read commentary on the delisting, including a comparison to similar moves by hedge fund manager Ellerston, click here.

By: Australian Fund Monitors

ASIC has released a statement to clarify uncertainty around the short-selling ban. This statement addresses the disclosure requirements and exemptions to the ban including the use of short selling to hedge derivative positions.

In summary, exemptions to the short-selling ban include:

• Hedging for existing positions pre-22 September 2008
  
• Dual listed entities
  
• Exercise of exchange traded options
  
• Index arbitrage transactions
  
• Certain covered short sales by Market Makers
  
• Hedging corporate underwriting risk

To read the full ASIC statement click here.

By: Reuters

Australia's share market watchdog has eased its blanket ban on short selling to allow investors trading the difference between share prices on dual-listed stocks to make covered short sales.

The move by the Australian Securities and Investments Commission (ASIC) largely affects funds trading in the dual-listed shares of top miners BHP Billiton Ltd/plc and Rio Tinto Ltd/plc.

Market operator ASX said on Tuesday the regulator would allow investors doing arbitrage trades on dual-listed stocks to use covered short sales on those stocks in Australia.

By: Australian Fund Monitors

The term "short" has been in use since at least the middle of the 19th century and refers to the deficit position that a short seller has with their brokerage firm. The practice has been around for centuries and has often been used a scapegoat when financial markets are going through a difficult period.

The first recorded instance of short selling is believed to have occurred in 1609 when a merchant arranged short sales on stocks of the Dutch East Indies Company VOC which was listed on the Amsterdam stock exchange. This also prompted the first attempt to ban the practice. In 1610, directors of the company persuaded the government to declare shorting illegal as bearish speculators were "incommensurably damaging innocent shareholders, among which are widows and orphans". Illegal short selling continued anyway, so in 1689 the Dutch government imposed a tax on profits from the activity.

A similar pattern recurred in 1720 in Great Britain when the speculative South Sea Bubble burst. Shares in the South Seas Company jumped from 325 pounds to 1200 pounds as merchants rushed to acquire the rights to trade with Latin American countries. When shares in the company later fell to just 86 pounds short sellers got the blame. A law banning short selling was introduced in 1734, but as it was never applied it was repealed in 1860.

New York state unsuccessfully banned short selling in 1812 following heavy speculative activity that occurred at the outbreak of war with England but was repealed during the 1857-59 depression. The US government tried to rein in short selling in 1864 with the Gold Speculation Act, however in just two weeks the price of gold rose from $200 to nearly $300 and the ban was lifted.

Bank failures and panic in the British financial markets in 1866 was blamed on short selling and a law was passed forbidding short sales on banking shares. Once again the law was never used and testimony to a Royal Commission in 1868 showed that the problems had been caused by irresponsible banking practices and poor asset quality.

Short selling continued throughout the 20th century, but so did the animosity toward its practitioners. In 1929 such was the fury of ruined shareholders that one short seller had to hire bodyguards.

The very first hedge fund employed short selling as part of its strategy. Established in 1949 by Australian-born Alfred Winslow Jones with $100,000, the fund combined long positions on undervalued shares with short positions on overvalued shares. The early 1980's saw the creation of the first companies that specialising in short selling, and hedge funds with focus on the practice became more attractive after the stock market crashes of 1987 and 2000.

It remains to be seen whether the regulatory reaction to recent market hysteria is any more successful than previous attempts to curtail short selling.