Greek double somersault and pike, with a twist.

Markets recovered over the past week based on one of the more spectacular backflips in political history. One wonders what the Greek referendum was all about, given the man who having called it, recomended a NO vote, and then got his wish, seemed to ignore the result. Irrespective of whether one belives the Greeks should, or should not accept the medicine their northern neighbours, particularly the Germans were prescribing' hardly matters. No wonder that the 60% of the Greek population that voted no are less than happy, or even decidely grumpy.

What seems odd to fathom is how anyone thinks the so called solution will cure the underlying problems? Adding more new debt to cover that already in place, as any consumer with a bunch of maxed out credit cards in their wallet would, or should know, would seem to be simply kicking the can a further three years down the road. So look out for Grumpy Greeks for at least the next three years, and Grumpy Germans when it all returns to bite them in three years' time. 

And so to China, which along with Greece seems to have been the major topic of Hedge Clippings for the past few weeks, as it has been for the mainstream financial press. Chinese quarterly GDP figures, once again delivered so swiftly that one has to assume they're fudged, came in at 7%, bang on target. What a wonderful co-incidence! Given Singapore's quarterly GDP declined sharply by 4% yoy, and a massive 14% annualised, in no small part as a result of reduced manufacturing and exports to China, it makes the Chinese GDP result even more questionable. 

What makes the data so rubbery is that power comsumption in China grew by just 0.8% over the quarter yoy, well below expectations and one of the lowest rates of quarterly growth in the past 20 years. Crude steel and pig iron production fell 1.7% over the quarter, the first decline since records began in 1994, cement was down 20.5% yoy, and glass by 6.6%, while rail volumes declined by 9%. Even though the reported GDP growth was 7% for the quarter, this was still the lowest in six years, assuming you take them as gospel.

People in some quarters have been unkind enough to call me a cynic (amongst other things) but I can't imagine why.

Specific results received this week include the following PERFORMANCE UPDATES:

The Paragon Fund returned -3.80% versus the ASX 200 Total Return Index's -5.30%, for the month of June 2015. The Fund's annual return since inception has been 18.82% p.a. versus the Index's 7.46% p.a. 

Morphic Global Opportunities Fund outperformed it's benchmark MSCI AC World Total Return in Australian Dollars by 0.31%.

FUND REVIEWS released this week: Monash Absolute Investment Fund; Optimal Australia Absolute Trust

UPCOMING EVENTS:

20 - 21 August 2015 -The 2nd Superannuation Fund Investment Operations Forum 2015 is a two day forum providing invaluable technological, regulatory compliant and best practice insights into improving back and middle office efficiency to drive member loyalty, bottom line profitability and a competitive edge

26 - 28 August 2015 -The 15th Annual Wraps, Platforms & Masterfunds Conference will provide solutions for succeeding in a distribution world of endless possibilities, showcasing strategies to help business achieve the biggest bite of market share, use innovation to overcome problems and support opportunities. Australian Fund Monitors is pleased to offer a discount of $300to all investors and advisors using coupon codepromoFMon registration.

15 September 2015 -The AIMA Australia Hedge Fund Forum 2015 is the annual non-profit hedge fund conference organised by the industry for the industry.

It's a while since "Now For Something Completely Different" featured one of our four legged friends, so this might bring a smile to your face.

And finally, best wishes for a happy and healthy week-end ahead,

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

Chinese authorities treading a dangerous path

The news that the China Securities Regulatory Commission was prohibiting investors who own more than 5% of a publicly traded company from selling shares for six months is likely to do more to damage their market than save it. The ban will include foreign investors who hold shares that trade on the Shanghai and Shenzhen exchanges, and comes after Chinese equities lost more than 25% of their value since mid-June.

If anyone can pull off what the Chinese authorities are trying to do, they can, but we doubt they'll succeed. They might be able to control their own citizens from selling shares in smaller caps, or freezing parcels of 5% or more of a publicly listed companies for six months, but the longer term damage to their reputation, and the confidence of traders, investors, and market participants at home and abroad, will be difficult to overcome.

What the Chinese authorities are doing is freezing liquidity, and in this regard it seems they haven't learned from the lessons of 2008 when central banks, governments, and regulators around the world tried to ban short selling, close markets, and in a word, panic. And if governments and the authorities panic, that's exactly what investors are likely to do as well.

Rudyard Kipling put it quite clearly: "If you can keep your head when all around you are losing theirs and blaming it on you" but it seems the Chinese authorities didn't listen, or haven't read Kipling.

By stopping investors selling smaller stocks, they're going to be forced to sell larger ones, and possibly the better ones, to cover their liquidity requirements, margin calls, their need for cash, or just to stuff under the mattress. While western authorities have probably learned from their mistakes of 2008 and might not make the same ones again in a panic, they also succeeded in restricting longer term liquidity through regulations on banks and other market participants in an effort to avoid another too big to fail scenario.

China threatens to make the Greek tragedy just a pimple by comparison. Whatever eventuates in Greece has largely been anticipated by most savvy investors over the past few years, and if a three year moratorium is agreed to it will probably only extend the agony further. There seems no way that the Greek economy, about the same size as that of the State of New South Wales, is ever going to be able to repay the levels of debt.

And so on to fund performance in June.

It was obviously a rocky ride on global markets in June, initially in response to Greece, but more recently as a result of China's problems. The ASX 200 Accumulation Index fell by 5.3%, and July has seen a continuation of the volatility since. Over the 12 months to the end of June the ASX200 rose only 1.17%, or 5.68% on an accumulation basis. By comparison and based on the 25% of fund returns received to date, equity-based hedge funds fell by only 1.41% in June, an outperformance of almost 4%, with 87% of those outperforming the ASX 200 Accumulation Index. Over the past 12 months equity-based funds have returned 11.57%, double the return of the accumulation index.

In addition to the performance updates below, results of note include Kentgrove Capital, (+4.1%) Totus Alpha Fund, (+6.3% (e)) QATO (+1.89%) Bennelong Long Short (+4.86%). 

Specific results received this week include the following PERFORMANCE UPDATES:

Monash Absolute Investment Fund fell 1.9% in June in a weak Australian equity market, but still taking the Fund's annualised return since inception to 14.11% p.a. 

FUND REVIEWS released this week: Totus Alpha Fund; Insync Global Titans Fund; Supervised High Yield Fund

UPCOMING EVENTS:

20 - 21 August 2015 -The 2nd Superannuation Fund Investment Operations Forum 2015 is a two day forum providing invaluable technological, regulatory compliant and best practice insights into improving back and middle office efficiency to drive member loyalty, bottom line profitability and a competitive edge

26 - 28 August 2015 -The 15th Annual Wraps, Platforms & Masterfunds Conference will provide solutions for succeeding in a distribution world of endless possibilities, showcasing strategies to help business achieve the biggest bite of market share, use innovation to overcome problems and support opportunities. Australian Fund Monitors is pleased to offer a discount of $300to all investors and advisors using coupon codepromoFMon registration.

15 September 2015 -The AIMA Australia Hedge Fund Forum 2015 is the annual non-profit hedge fund conference organised by the industry for the industry.

And finally best wishes for a happy and healthy week-end ahead,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

Grexit Reality - But maybe we need a reality check ourselves?

Actually Greece isn't out of the EU just yet, but the default is a reality, and unless someone blinks, either as a result of Sunday's referendum, or the reality of the consequences of exiting both the political and currency union, the rest as they say, will be history. The problem is no-one can actually say in advance what that history might look like, apart from the certainty that it is going to get messy.

The fact is that the Greek problems were a classic example of the boiling frog syndrome, in that they developed, or simmered for a long time with nobody prepared to fix the problem until it was too late. The release this week of The Grattan Institute's working paper, entitled "Fiscal challenges for Australia", made us wonder if we aren't heading for our own equivalent of the Greek tragedy, even though to many it might seem we're a long way off at present.

At first glance we're sitting, if not pretty, but at the top of the tree when it comes to net levels of Commonwealth government debt to GDP, which is projected to peak at 18% in 2017. This excludes state government debt, and for good measure treats the value of the Future Fund as an asset. However, the Grattan report notes that when it comes to forecasting, the Federal government's forecasts consistently contains highly optimistic assumptions about revenue growth and spending restraint.

For the last six years budget outcomes have been worse than projections, and both the previous and current Governments have been unwilling to address deep seated issues, instead relying either on the mining boom (gone!) and personal income tax bracket creep to raise additional revenue, while refusing to curb excessive spending. In other words we haven't been the only ones not prepared to accept the austerity measures (increase taxes, reduce spending) needed.

In its place we have increased taxes by stealth, otherwise known as bracket creep. According to a recent article in the Financial Review, the government's reliance on bracket creep will push the average full time worker in Australia on $78,000 a year into the second highest tax bracket this financial year, with any earnings above $80,000 subject to a tax rate of 39% including the Medicare levy. This will earn the government, and cost the average income earner, an additional $1,200 per year over the next decade, and take their average tax rate from 21.7% to 27.4% over the next decade.

The current Federal Government has refused to address major issues such as changes to the taxation of superannuation, changes to the GST (as did the previous Labour government), or curbs on negative gearing, thereby excluding three major reforms which would get them out of the fiscal hole that has been deepening for some time. Relying on personal income tax bracket creep seems to be their only solution, with the creep the equivalent of the above mentioned frog in his slowly warming pot.

As the Grattan Institute correctly points out, hoping for the best is not a budget management strategy: It simply justifies putting off hard decisions, and shifts the costs and risks of budget repair onto future generations, with their research showing that each $40 billion dollar deficit increases the lifetime tax burden for households headed by a person aged 25 to 34 by $10,000.

Your Clippings correspondent can rest easy - it won't be his problem. He's waaay older than that, and will be part of the other side (expenditure) of the problem once he starts to draw a pension!

Specific results received this week include the following PERFORMANCE UPDATES:

The Insync Global Titans Fund increased by 3.0% in May, bringing the Fund's prior 12 month performance to 20.79%.

Totus Alpha Fund was down 1.80% in May, compared to the ASX200 Accumulation Index's 0.40%. However the Fund's annual performance of 23.31% p.a has been strong (Index 14.43% p.a.).

The Signature Quantitative Fund returned -1.20% for May, to bring the annual performance since inception to 11.34%.

Supervised High Yield Fund rose 1.04% during May to bring the Fund's annual return since inception to 10.22%. In the same time frame the RBA Cash Rate returned 3.45%.

FUND REVIEWS released this week:Aurora Fortitude Absolute Return Fund; Pengana Absolute Return Asia Pacific Fund

UPCOMING EVENTS:

20 - 21 August 2015 -The 2nd Superannuation Fund Investment Operations Forum 2015 is a two day forum providing invaluable technological, regulatory compliant and best practice insights into improving back and middle office efficiency to drive member loyalty, bottom line profitability and a competitive edge

26 - 28 August 2015 -The15th Annual Wraps, Platforms & Masterfunds Conference will provide solutions for succeeding in a distribution world of endless possibilities, showcasing strategies to help business achieve the biggest bite of market share, use innovation to overcome problems and support opportunities. Australian Fund Monitors is pleased to offer a discount of $300 to all investors and advisors using coupon code promoFM on registration.

15 September 2015 -The AIMA Australia Hedge Fund Forum 2015 is the annual non-profit hedge fund conference organised by the industry for the industry.

And now for something completely different. An article in today's Guardian Australia suggesting that in the mid eighties, with the Hong Kong handover looming, and the Troubles in Northern Ireland in full swing, UK officials considered relocating 5.5 million Hong Kong citizens to Ulster, but were concerned about how they'd adapt to the weather. Had it been April 1st you might understand it, but really?

And finally best wishes for a happy and healthy week-end ahead,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

The Game of Greek Chicken Continues

Last week's Clippings noted that Morphic's Jack Lowenstein thought that any Greek solution would (if any) be last minute, but not long lasting. He's certainly right on his first call, although it is too early to tell as yet if there will actually be a solution. We are not sure if they're playing a dangerous game of chicken or not, but it seems that those in the north of the EU are driving a hard bargain, and the Greek PM is between a rock (those in the North) and a hard place, namely the Greek electorate.

The Northerners want hard decisions made both on the revenue and expenditure side. That means increased taxes, and reduced spending. The electorate, who will decide new Greek PM Tsipras' fate at the end of the day, aren't too happy about that. One also has to remember that Tsipras, and his Finance Minister are or were both products of the Greek Communist Party, so fiscal discipline and economic management might not be their natural calling. In any event it seems that the Germans won't budge, and Tsipras has little room to move. For further background read this piece from Arminius Capital's Marcel von Pfyffer.

For what it's worth Marcel's view (he's Swiss Australian, in case you were wondering, not German) is that "Greece will, as sure as the sun sets, default on its debt."

Closer to home the revelations by Fairfax's Adele Ferguson last Saturday (and since) that there was a serious compliance issue at IOOF must have caused shudders in a number of quarters, including ASIC and the board of IOOF itself.

A brief read of IOOF's March 2015 quarterly report would have you beleive that compliance was front and centre in the board's minds. And inded it might have been, but between the board, the stated complaince policy covering 8 full pages, and what is alledged to have occured, there appears to be a significant gap.

This is obviously bad news, not only for IOOF, as it is a further nail in the coffin of much of the financial services sectors' reputation, coming after CBA, Macquarie and others' failings. Strangley in the Senate both sides of politics voted together to knock back a Royal Commission, but Clippings is not sure it would have proven, or changed much. 

As Mike Mangan, quoted (loosely) in the AFR said on Monday there's not going to be a change of behaviour in the industry until some serious sanctions are brought to bear on the wrongdoers. By serious he means jail time, and as he so succinctly put it "the only thing that scares the shit out of white collar workers is jail time."

To be fair a few have gone to jail since 2008, but only a few, including the notable Maddoff in the US, and closer to home Astarra's Shawn Richards. But in the meantime the collective fines and penalties paid by (shareholders of) financial institutions and banks worldwide to cover their corporate and management sins between 2008 and 2014 exceeds $150 billion, enough to go somewhere towards paying off some Greek debt. The "victims" of those misdeeds meanwhile haven't received a cent, penny, centime or drachma! 

Specific results received this week include the following PERFORMANCE UPDATES:

Avenir Value Fund had a strong performance of 4.50% during the month of May, compared to the ASX 200 Accumulation Index's 0.40%.

The Pengana Absolute Return Asia Pacific Fund finished +1% for the month, compared to the HFR Event Driven Index which closed +0.5%.

Since inception in August 2014, QATO Capital Market Neutral Long/Short Fund has returned 37.93%.

Freehold Absolute Return Fund has an annualised return of 17.48% p.a., compared to the ASX200 Accumulation Index's 15.15% p.a.

The Laminar Credit Opportunities Fund returned 0.65% over the month of Month, bringing its annual performance since inception to 18.96%.

FUND REVIEWS released this week: Bennelong Kardinia Absolute Return Fund; Optimal Australia Absolute Trust; Morphic Global Opportunities Fund

UPCOMING EVENTS:

20 - 21 August 2015 -The 2nd Superannuation Fund Investment Operations Forum 2015 is a two day forum providing invaluable technological, regulatory compliant and best practice insights into improving back and middle office efficiency to drive member loyalty, bottom line profitability and a competitive edge

26 - 28 August 2015 -The 15th Annual Wraps, Platforms & Masterfunds Conference will provide solutions for succeeding in a distribution world of endless possibilities, showcasing strategies to help business achieve the biggest bite of market share, use innovation to overcome problems and support opportunities. Australian Fund Monitors is pleased to offer a discount of $300 to all investors and advisors using coupon code promoFM on registration.

15 September 2015 -The AIMA Australia Hedge Fund Forum 2015 is the annual non-profit hedge fund conference organised by the industry for the industry.

And finally best wishes for a happy and healthy week-end ahead,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

Greece moves from close to the edge, to on the edge.

Four or maybe five years ago (Hedge Clippings loses track of time as the years roll by) at the GAIM hedge fund conference in Monaco, a show of hands was held to see how many of the 400 or so assembled attendees thought Greece would survive as part of the EU. To the surprise of some, myself included, less than half of the audience were positive about the eventual outcome.

Had further questions been asked about how soon such an exit might occur fewer might have picked 2015, but now  much wrangling has passed it appears that Greece is literally teetering on the edge of the EU cliff, and that a Grexit is more than just a 55/45 possibility. It is doubtful that a minor economy such as Greece's will have too much of a direct impact on Australia, but the indirect effects could be considerable. To be honest our expertise in this area is limited, so the opinion of those with greater knowledge is likely to be much more worthwhile.

Morphic Asset Management's recent blog (27th May) might be slightly more on the money, even if written a month or so ago. Their Greek expert, Irene Kardasis belives that an agreement will be reached sooner or later, and everyone will have to compromise. Meanwhile Morphic's risk averse CIO, Jack Lowenstein believes that the Europeans have already written Greece off, and that any deal, if there is one, will be last minute, but probably not long lasting.

He's right about it being last minute, and will probably be right about it not lasting long as well. You can find Morphic's full comments here.

Specific results received this week include the following PERFORMANCE UPDATES:

Allard Investment Fund net of all fees, increased 1.0% during the month of May 2015.

The Bennelong Kardinia Absolute Return Fund rose 0.41% in May, to bring the Fund's annual performance since inception to 13.01% compared to the ASX200 Accumulation benchmark's 5.60%.

Morphic Global Opportunities Fund rose 3.79% in May as its benchmark (MSCI AC World Total Return in Australian Dollars) rose 2.91%, resulting inoutperformance of 0.88%.

The Optimal Australia Absolute Trust reported a net positive return in May of 2.04%, compared to the ASX200 Accumulation Index of 0.40%.

The Paragon Fund returned 2.40% versus the ASX 200 Accumulation's 0.40%, for the month of May 2015. The Fund's annual return since inception has been 21.66% p.a. versus the Index's 10.39% p.a.

Cor Capital Fund returned 1.23% bringing the 12-month return to 8.04%, exceeding the RBA Cash Rate Benchmark by 5.6%.

FUND REVIEWS released this week: Bennelong Long Short Equity Fund; Monash Absolute Investment Fund

UPCOMING EVENTS:

20 - 21 August 2015 -The 2nd Superannuation Fund Investment Operations Forum 2015 is a two day forum providing invaluable technological, regulatory compliant and best practice insights into improving back and middle office efficiency to drive member loyalty, bottom line profitability and a competitive edge

26 - 28 August 2015 -The 15th Annual Wraps, Platforms & Masterfunds Conference will provide solutions for succeeding in a distribution world of endless possibilities, showcasing strategies to help business achieve the biggest bite of market share, use innovation to overcome problems and support opportunities. Australian Fund Monitors is pleased to offer a discount of $300 to all investors and advisors using coupon code promoFM on registration.

15 September 2015 -The AIMA Australia Hedge Fund Forum 2015 is the annual non-profit hedge fund conference organised by the industry for the industry.

We are going to avoid any political comments this week, inspite of there being much to comment on: Bill Shorten and the AWU; US Presidential candidates Donald Trump and JEB Bush; Tony Abbott's disdain for clean energy etc. We are probably spoilt for choice, particulary after the Pope's comments on climate change. 

Instead this week's "And Now for Something Completely Different" is altogether more hopeful and uplifting.

And finallybest wishes for a happy and healthy week-end ahead,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

That's not a bubble, This is a bubble! Or is it?

Hedge Clippings spent an interesting and informative morning this week at Money Management's Asset Allocation event. Apart from moderating a series of discussions covering retirement income amongst financial and wealth advisors, we were treated to a keynote presentation from Stephen van Eyk.

Stephen opened his address by stating that in preparing his presentation he had determined that he would try to put a positive view on his outlook for our collective financial outlook, but that having sifted through all the data and looked at the evidence, this would unfortunately not be possible. No matter which way one looked at it, Australia's low economic growth wasn't responding to interest rates of 2%, and weren't likely to, providing a headache for both the government and the RBA.

The event was wrapped up with a panel discussion entitled "What is the New Bubble", consisting of five leading fund managers, namely Alva Devoy from Fidelity, Tim Samway from Hyperion, Dr Phil Hofflin from Lazard, Anton Tagliaferro from IML, and Matthew Drennan from IOOF. Some interesting ideas, comments and statistics emerged with the usual varying degrees of optimism and pessimism, some of which I managed to recall after the event. Of course given the RBA's comments earlier in the week regarding Sydney house prices, and some typically insensitive, albeit obvious comments from the Treasurer, the discusion leaned towards a real estate bubble.

Anton noted that he did not expect a crash, as they only occurred when not expected, although he also noted the concentration risk within equity markets, and that in his opinion QE had resulted in one of the greatest examples of wealth transfer (from tax payers to financial markets) in history. His expectation was that low growth is set to continue.

Alva Devoy noted that we should get used to current conditions as the "new normal" and it was likely to be 10 years before interest rates returned to the old normal, and that as a result monetary policy would continue to support stretched equity valuations.

Phil Hofflin wondered if we were heading down the Japanese path of long term low growth in spite of central bank stimulation, and turning to the housing market warned of the 65/65 ratio: 65% of bank assets in Australia are in housing, which in turn is on a PE multiple of 65 times, and that the total value of Australia's housing market, if it does correct, is many times larger that the equity market.

Finally Matthew Drennan cautioned that traditional safe havens may not turn out to be so safe. All in all while some of the panel were more cautious than others, along with Stephen van Eyk, none were overly optimistic either.

Specific results received this week include the following PERFORMANCE UPDATES:

Monash Absolute Investment Fund returned -0.40% in May, taking annualised performance since inception in May 2012 to 15.35%.

The Bennelong Long Short Equity Fund performance in May was down 1.91% taking annualised performance since inception in January 2003 to 17.05%.

Allard Investment Fund  returned 1.0% during May, with annualised performance since July 2003 of 9.99%.

FUND REVIEWS released this week: Insync Global Titans Fund; Monash Absolute Investment Fund

UPCOMING EVENTS:

20 - 21 August 2015 - The 2nd Superannuation Fund Investment Operations Forum 2015 is a two day forum providing invaluable technological, regulatory compliant and best practice insights into improving back and middle office efficiency to drive member loyalty, bottom line profitability and a competitive edge

26 - 28 August 2015 - The 15th Annual Wraps, Platforms & Masterfunds Conference will provide solutions for succeeding in a distribution world of endless possibilities, showcasing strategies to help business achieve the biggest bite of market share, use innovation to overcome problems and support opportunities.  Australian Fund Monitors is pleased to offer a discount of $300 to all investors and advisors using coupon code promoFM on registration.

15 September 2015 - The AIMA Australia Hedge Fund Forum 2015 is the annual non-profit hedge fund conference organised by the industry for the industry. 

And finally best wishes for a happy and healthy week-end ahead,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

Volatile global bond markets unsettle markets

While equity markets usually grab the business headlines, it is the global bond market which really carries the punch. The past month has seen some extreme, and worrying moves on bond markets, with German 10 year bonds moving from 0.05% to 0.90% in an unprecendented period of volatility, in part driven by dwindling liquidity.

Other markets have followed suit, with the US 10 year rate moving from 1.80 to 2.30%, and Australia's from 2.30 to 3.05%. 

The background for the situation has been created in part by central bank intervention which has pushed interest rates to unsustainably low levels on the back of QE, and in part by regulators forcing, or at least discouraging, banks from participating as market makers though legislation such as the Volker Rule contained in the Dodd Franks Act.

Expect to hear and feel much more of the outcome of these moves over the weeks to come, with bond markets reportedly 3 times the size of equities. As George Colman from Optimal notes in his monthly note "Beware the bonds: Central banks may just have lost control". Regular readers of Hedge Clippings will note we are prone to quoting George, who has been on the bearish side for some time, but having returned 2% for each of the past two months it is more than possible that his views are worth listening to.  

Australia's situation is somewhat different, although no less worrying, in spite of Treasurer Hockey's describing those concerned about the economy as "clowns" for being negative. No sooner had he done so than flat retail sales figures for April were released, possibly indicating who was really wearing the clown's outfit.  

Specific results received this week include the following LATEST PERFORMANCE UPDATES:

Supervised High Yield Fund rose 0.52% during April to bring the Fund's annual return since inception to 10.18% aganst the RBA Cash Rate return of 3.47%.

QATO Capital Market Neutral Long/Short Fund  although down -2.96% in April has still returned 16.93% over the last 6 months.

The Insync Global Titans Fund fell -0.40% in April, with 12 month performance 19.27%.

Signature Quantitative Fund returned -2.10% for April, to bring the annual performance since inception to 13.11%.

The Cor Capital Fund was down 0.65% in April to bring annual performance since inception to 5.55% p.a., compared to the RBA cash rate of 2.68% p.a.

Chris

CEO

AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn and Twitter

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

Boombustology

The title of today's Hedge Clippings comes from a book of the same name by Vikram Mansharamani. As the name (the book's, not the author's) suggests, it explores the almost inevitable cycle between history's booms and their ensuing busts. 

Last week's Clippings explored two different opinions on the Chinese economy, with the bearish view referring to debt levels identified in an article in the Chinese language version of the People's Bank of China's (PBoC) first-quarter Monetary Policy Report. We also noted the risk created by the levels of margin lending at both street and corporate level.

Thursday's fall of over 6% on Chinese equity markets, reportedly on the back of a tightening of margin lending levels, possibly came a little faster than we had expected, but still reinforced the concept of boom-bust-ology. History has shown that for every irrational boom there is an inevitability that there will be an ensuing bust. It might be too early to call -6% a bust, but the speed and suddenness of the move would have to signify the potential for one.

Closer to home it would be a stretch to describe Australia's economy in the bust phase following the mining boom, but it is certainly struggling with the transition. Hence Philip Lowe, the Deputy Govenor of the Reserve Bank of Australia, in a speech entitled Managing Two Transitions, last week described the difficulty the economy is facing.

The problem is that Australia's manufacturing sector is not taking up the slack from the mining boom. As strong as the housing and property markets are, they are insufficient to prop up non-mining business investment. This is inspite of historically low interest rates, with Lowe making the point that Australian businesses have not reduced the hurdle rate of return required for making new investment decisions in line with lower rates.

Obviously investment decisions are driven by far more factors than interest rates, however when interest rates are high the hurdle does rise. The paradox for the economy is that the same is not true when they fall. As a result capital expenditure is falling, and is likely to continue to do so in spite of the RBA's requests.

To what extent the government (and opposition) are responsible for the lack of business confidence remain to be seen, and difficult to pinpoint, but it has been some years since either side of the political fence in Canberra provided any cause for optimism.

Specific results received this week include the following LATEST PERFORMANCE UPDATES:

KIS Asia Long Short Fund rose 4.04% during April, bring the Fund's annual return since inception to 15.48% p.a.

The Laminar Credit Opportunities Fund returned 0.54% over the month of April, bringing its annual performance since inception to 19.13%.

Morphic Global Opportunities Fund rose 0.02% in April as its benchmark (MSCI AC World Total Return in Australian Dollars) fell 0.33%, resulting in outperformance of 0.35%.

The Avenir Value Fund returned -3.57% in the month of April compared to the  ASX 200 Accumulation Index -1.70%.

Aurora Fortitude Absolute Return Fund  rose 0.34% as the market experienced higher volatility over the month of April.

The Paragon Fund returned 1.10% versus the ASX 200 Accumulation's -1.70%, for the month of April 2015. The Fund's annual return since inception has been 21.24% p.a. versus the Index's 10.60% p.a.

Totus Alpha Fund was down 4.5% in April compared to the ASX200 Accumulation Index's -1.70%. However the Fund's annual performance of 24.74% (ASX200 Accumulation Index 14.70% p.a.) has been strong.

Chris

CEO

AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn and Twitter

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

Two different views of China

There appear to be two different views when it comes to the outlook on China: In Thursday's Australia Financial Review Louis-Vincent Gave of Hong Kong's GaveKal Dragonomics outlined why he describes himself as a "massive China bull". The article went on to explain that Gave believes the global investment community is underexposed to Chinese stocks and bonds, and as a result will be compelled to increase its exposure over the coming 3 years as Chinese financial assets begin to be included more fully in the global benchmarks that passive, and many active institutional investors track.

That certainly could occur, and one should never ignore markets which rise on the back of the pure weight of money which either has to invest, or can find little reason not to. For an example of the latter, just consider the recent bull run in Australian bank and high yielding shares. However it doesn't necessarily mean that the fundamentals of the underlying Chinese economy, or the companies operating there are investment grade or secure.

Taking the other view is this article entitled China is Choking on its Own Debt which drew attention to the release earlier this month of the People's Bank of China's (PBoC) first quarter Monetary Policy Report. The report somewhat alarming given the authoritative source, in that it points out that:

1. China has too much debt
2. The government has relied too heavily on investment for growth
3. Credit expansion is no longer possible
4. The economy is inevitably decelerating as a result

If all of that is alarming in itself, so is the reason that the report received so little media exposure: Given that the conclusions are not new for most avid watchers of China the fact that it has yet to be published in an English language version perhaps suggests why didn't hit the headlines, most probably because the Chinese government didn't want it to.

As the article points out the PBoC website has somewhat of a history of being less than transparent when it comes to posting English language versions of articles, citing April as an example when 32 stories were posted in Chinese while only 12 made it to the English version. There are many conspiracy theorists who believe that the level of influence exerted by the Chinese government on economic statistics are, not to put it too mildly, relatively well controlled.

Which of the two opinions play out in the future remained to be seen, and to be fair the Chinese authorities' manipulative attitudehas been known to work in the long run. However a combination of the above, and anecdotal evidence of massive margin lending at street level as well as corporate, will keep the risk factor high.

Specific results received this week include the following LATEST PERFORMANCE UPDATES:

Bennelong Long Short Equity Fund performance in April was flat (0.03%), however long term performance remains sound with since inception (Jan 2003) returns of 17.33% pa (Index 8.56%) and a volatility of 11.79% (Index 12.86%).

The Pengana Absolute Return Asia Fund had a strong performance of 3.87% for the month of April, bringing the annualised return since inception to 11.43%.

Allard Investment Fund increased 1.50% during the month of April, to bring the Fund's last twelve month performance to 27.08%.

Chris

CEO

AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn and Twitter

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

Hedge Funds show their mettle

Every cloud has a silver lining, or so they say, so the volatility in Australia's equity market in the last couple of weeks, and which saw the ASX 200 drop 1.7% in April following a negative (albeit small) fall of 0.06% in March has probably played into the hands of hedge fund managers. Local equity-based hedge funds have gained around 1.2% over the past two months, and have now outperformed the index by 2.5% percent over a rolling 12 month period.

Globally it is no different. Industry newsletter Hedgeweek reported this week that hedge fund managers may be showing their mettle as global financial and geopolitical volatility continues, with the hedge fund industry beginning to beat popular indexes, according to eVestment's just-released April 2015 Hedge Fund Performance Report.

There has been a very long and very active debate over the value of hedge funds, but the popular opinion of hedge funds as being highly risky is simply not borne out by the facts. In a strongly rising market the protection taken by hedge fund managers on the short side frequently sees them underperforming, but when volatility increases and markets fall, their short positions come into their own.

This is not always the case, and there are someexceptions to the rule with a handful of fund managers behaving or performing according to the myth. Thankfully there are others, and many more of them, who outperformed the market in both positive and negative markets. By definition this is difficult to do as they have to actively short stocks or the market to drive performance, rather than just to reduce risk. Part of the skill when selecting the best manager to suit the end investor's objective therefore is to analyse both their up and down capture ratios.

Talking of risk, it seems that twenty years after bringing down major British bank Barings (which listed amongst its historical credits funding the Napoleonic wars), the SMH reports that rogue trader Nick Leeson is sounding alarm bells about China. Unless the country reforms its stock markets, he warns, it's only a matter of time until his earlier disaster repeats itself on a larger scale. So it  is not only rogue traders that create risk, but underlying government controls or lack thereof. The level of speculative trading in China driven by retail investors (or should that be punters?) funded by margin trading is, unless they are very, very careful, going to lead to inevitable volatility, and a repeat of the damage witnessed in 2008.

Finally Hedge Clippings can't resist mentioning something about this week's budget. It was certainly better than last year's, but we can't help feeling that it's really all about job protection - those of Treasurer Joe Hockey, and the Prime Minister, Tony Abbott. The real issue we see with the budget, was its lack of commitment to tackle major issues for the future. For example, consider the estimate that in 10 year's time the tax concessions on superannuation will cost the nation double that of the age pension - which the superannuation system was orginally designed to reduce.

Specific results received this week include the following LATEST PERFORMANCE UPDATES:

Optimal Australia Absolute Trust Fund reported a net positive return in April of 1.96%, compared to the ASX200 Accumulation Index of -1.70%

The Bennelong Kardinia Absolute Return Fund fell 0.59% in April to bring the Fund's annual performance since inception to 13.08% compared to the ASX200 Accumulation benchmark's 5.61%.

Monash Absolute Investment Fund had a flat April (0.0%), while the Australian equity market had its second consecutive negative month (-1.70%).

Chris

CEO

AUSTRALIAN FUND MONITORS

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