Having given the Treasurer a break in last week's Hedge Clippings, we're going to do the same again this week. After all this missive is called "Hedge Clippings", not "Head Kickings", and however tempting, there's not much that we can add to the debate. Even Clive Palmer is helping to distract attention from the budget.

So back to last week's topic, and the difficult investment markets that hedge funds both in Australia and overseas are currently navigating. While the averages have improved marginally now that most funds have reported, the reality remains that the sector as a whole lost 0.08% in April, while equity-based funds lost 0.17%, against the ASX 200 accumulation index which rose 1.77% for an outperformance of almost 2%.

Although specific corporate action caused some damage to crowded short positions in the likes of Goodman Fielder and Treasury Wine Estates, the broader feedback from a number of hedge funds managers was that the rotation out of quality stocks, and into poorer ones (or as one manager more simply put it "the crap") was making life particularly difficult.

This is also borne out by an interesting chart we saw from Goldman Sachs Global Investment Research in the US which showed the relative long/short performance of those companies with strong balance sheets, versus those with weak balance sheets - in other words "quality versus crap".

Normally one would expect quality to outperform, but given the effects of QE and easy credit, that position has reversed over the past two years to the point where there has been a steady increase (now in the region of 50%) in the outperformance of companies with weak balance sheets. Equally companies that are paying high dividends, as opposed to those reinvesting their profits in building their business, are understandably becoming more attractive given investors' the alternative of leaving money in the bank.

What was apparent talking to fund managers this week was that long/short investing is not nearly as straightforward as simply buying companies you like, and selling those you don't, particularly in the short term when the companies you don't like are sold down to such an extent (and often for a very good reason) that they become compelling or more attractive to private equity players or other corporate activity.

Life, as one ex-prime minister once remarked to his regret, "wasn't meant to be easy", particularly for a hedge fund manager.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

In a volatile market for it's sectors, the Nanuk Global Alpha Fund returned -2.93% during April with annual performance standing at 17.11%.

Allard's Investment Fund returned 8.84% for the last year with a vol of 6.68%.

The Auscap Long Short Australian Equities Fund returned 0.29% in a volatile month, with annual performance 44.01% to April 2014.

With a very low volatility of 3.3%, the KIS Asia Long Short Fund returned -0.77% during April and 14.33% for the preceding 12 months.

The Pengana Australian Equities Market Neutral Fund returned -1.20% during April with twelve month performance of 12.29% and volatility of 8.43%, while it's Australian Equities Fund had a positive month, returning 1.24%.

Although it had a negative April, the annual performance of Avenir's Value Fund is very strong at 40.16% with a volatility of 8.50%..

FUND REVIEWS updated this week included: 

Optimal Australia Absolute Trust - Insync Global Titans Fund - Monash Absolute Investment Fund

FUTURE EVENTS:

18 June in Sydney: MAX: the Marketing, Advertising and Sales Excellence Forum and Awards. Forum 8am - 4:30pm; Awards dinner 7-10pm.

14-15 August in Sydney: Alternative Investments Conference - Investigating the rise and rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different this week,.. although he passed away in 1989, it would have been Mel Blanc's birthday today, the man of a thousand voices, we thought you might enjoy this clip from the Jack Benny show, it's an oldie but a goodie.

On that note, I hope you have a safe and happy weekend.

Best wishes,

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.

April was a tough month at the office for Absolute Return and Hedge Fund managers based on the 70% of performance reports received to date.

While the ASX 200 Accumulation Index rose 1.77%, AFM's index of all funds lost 0.23%, with equity-based funds bearing the brunt, down an average of 0.34%. While we are used to, and would expect hedge funds to underperform in strongly rising markets, lagging by 2% and with a negative number to boot is unusual.

While the performance for a single month is disappointing, over 12 months there is little difference across all 333 funds which have gained 10.02% versus the ASX 200 accumulation index at 10.46%. Equity-based funds, which make up 60% of the total have done better, with a 12 month average return of 14.08%.

58% of fund returns to date were positive, against 90% over the past 12 months, while only 15% outperformed the ASX 200 in April, rising to 54% over 12 months.

There are probably a number of reasons for April's disappointing returns: Firstly divergences between large and small cap stocks, with the ASX 200 adding 1.7%, and the Small Cap Index falling 1.2%. As a further indication the ASX Top 20 rose 2.2% for the month, with yields once again driving this segment of the market. Although the absolute return sector is not homogenous it is fair to say that on average they have less exposure to the large end of the market, preferring to seek value down paths that are less trodden by broking analysts.

Secondly there was a sell-off in growth and tech stocks, reflecting the same scenario in the US, which have risen over the past 12 to 24 months to be on unacceptably high future earnings multiples. Once again this has been a happy hunting ground for many of Australia's smaller boutique fund managers, who have benefited significantly from positions in stocks such as Seek, Xero and REA.

Further damage was done to the small cap sector with anecdotal evidence that a couple of large institutional mandates had switched managers, and the change in portfolio holdings had damaged prices as a result of the limited liquidity at this end of the market.

It was interesting to note that some of the best performing funds, which had provided annualised terms of over 30% in the past 12 to 24 months, found April difficult and struggled to produce a positive return. We doubt that April was the start of a new trend, but was more likely to be a month in which various factors, which had previously provided some excellent returns, shifted, and the very nature of their styles will enable them to adjust accordingly.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

The Totus Alpha Fund has returned a strong 39.11% over the last 12 month with a volatility of 16.37%.

Alpha Beta's Asian Fund recorded a return of -1.23% during April and 10.37% over the prior 12 months with a low volatility of 5.41%.

The Intelligent Investor Value Fund returned -3.44% (Small Cap Index -1.2%) in a weak small cap market with the 12 month result 18.67%.

Aurora Fortitude's Absolute Return Fund returned 0.01% in a choppy month for market neutral funds, bringing its annual return to 5.96%.

The Insync Global Titans Fund returned -1.0% in April with annual performance coming in at 15.97% with a Sharpe ratio of 1.39.

Cor Capital's Fund returned +0.51% for the month of April 2014. The total return since inception in August 2012 is 9.0% or 5.1% p.a.

FUTURE EVENTS: coming up this week

Wednesday 28 May in Sydney: Lunchtime education event presented by AIMA - the panel will explore topics such as Marketing and fund raising for Australian hedge funds & boutiques; Maintaining independence vs aligning with fund incubators / investment partners and more. Speakers include Jarrod Brown from Bennelong Funds Management and John Corr from Aurora.

28-30 May 2014 in Sydney: IBR Conferences presents the Asset Allocation Conference. This event has been designed to both update and educate investors by taking an in-depth look at these more adaptive asset allocation strategies and practices and where the best opportunities for high return lay in the current climate.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different this week, I'd like this guy on my side - aged 18 and 134 kgs.

On that note, I hope you have a safe and happy weekend.

Best wishes,

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.

Firstly an apology for an error in our Hedge Clippings two weeks ago (May 2^nd) where it was stated that the Federal budget would be handed down last Tuesday, May 6^th. We were a week early, based on our misguided view that "budget night" was traditionally the first Tuesday in May.

Secondly, an apology for suggesting that the pre-budget leaks were designed to be softening us up, and that the news on the night would not be as bad as expected, and we would all thank the Treasurer for being so kind. The fact is that by and large everything on the day was well telegraphed, and therefore planned, perhaps with the exception of the Treasurers' cigar chomping, disco dancing images that somehow made it into the media.

There's no doubt there needs to be some changes made and medicine to be taken on both the revenue and expenditure side, but we can't help feel the PM's "more pain, more gain" mentality is better suited to his sporting attitude than the gentle art of persuading an electorate that the solutions that have been suggested in the budget are acceptable.

As indicated in the previous Hedge Clippings, the risk is that the spending and welfare cuts will damage consumer confidence which is the lifeblood of the economy. Added to that risk is that the PM's and his government's political goodwill has been damaged to the extent that if the budget bills are blocked in the senate, and a double dissolution is called, he might go down as one of the shorter serving PM's in history.

OK, so enough empty opinion. What's the collective remedy of the kitchen cabinet that met today after the early morning swim at LPAC over a cup of coffee?

GST:

Get on with it! Increase it to 12.5% or 15%, possibly in two tranches. OK a broken promise, but only one, as opposed to many. And it would be a brave opposition that tried to block such a move as it would prevent them increasing GST themselves down the track. The decision on widening the GST to include food, health and education was split 50/50 and therefore deferred as I didn't have a casting vote.

The joy of the GST from the government's perspective is the system is already in place, the revenue would flow almost immediately, and there would be virtually no incremental collection costs. And the higher a persons income the more they are likely to consume, which is why it's known as a consumption tax.

2015 GST revenue estimate: $54 bn. Cost of exemptions for food, health and education etc $17 bn.

Revenue benefit: $27bn in 2015 if raised to 15%, and another $15 to $20bn if broadened to include food, health and education.

Income Tax:

Increase the tax free threshold to provide relief for those on lower incomes as a result of the added costs of the increase in GST. By all means tighten eligibility for some benefits to ensure welfare is delivered to the needy, not the greedy, remembering JFK's inaugural address in 1960 "If society cannot help the many who are poor, it cannot save the few who are rich."

We assumed the tax free threshold increase would cost $10 bn, leaving the net increase from GST at 15% between $17 and $37 billion.

The new tax levy for those earning over $180,000 a year is insignificant, reportedly costing $7 a week, or two cups of coffee at that level, and an insult to those lower down the salary tree feeling the pain. GST at 15% would collect far more from the well off than the new tax levy, as well as being permanent.

Budget estimate for individual income and withholding tax is $178.8 billion.

Company tax:

Budget estimated income: $71.6bn. As a thought, why do higher earning individuals pay higher tax rates, but there's a flat tax rate for companies?

Negative Gearing on Investment Property:

Scrap it, to be phased out over 5 or 10 years to ease any sudden fall in property values. It currently cost the government $4 billion a year and is claimed by 1.2 million tax payers. Possibly retain it on newly built homes only.

Added benefit: Improves housing affordability, especially for first home buyers.

Fuel tax:

No need to break that promise, the increase in GST on petrol sales would generate far greater revenue.

Superannuation:

Now it gets tricky!  

Tax concessions on "super" cost the budget $35bn.  However, properly implemented super should result, as originally intended (over time) in the government not having to fund as many retirees.  Estimated cost of income support for seniors (aged pension) is currently $42 bn, so provided super could only, or mainly be taken as an annuity pension rather than a lump sum, the demand or eligibility for aged welfare would reduce significantly.

As an aside, the kitchen cabinet proposed a portion of all super should be invested in Infrastructure Bonds, paying a defined income stream. More on that another day.

Conclusion:

Would all that fix the deficit estimate of $24 billion?  With some adjustment we thought so, even if the calculations were on the back of an envelope, although with the benefit of the Budget Estimates provided by the government's web site.

Would it fix the PM's credibility?  That might be a tad tougher, but on balance we thought he'd have a better chance with the Senate, and possibly the electorate as well.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

The Supervised High Yield Fund returned 0.21% for March and 7.74% over the prior twelve months with a vol of 0.74%.

Optimal Australia's Absolute Trust returned 0.57% in a choppy market with annual returns of 4.62% and a volatility of 1.6%.

The Bennelong Kardinia Absolute Return Fund recorded a return of -0.63% during April with the 12 month result 7.53% and a volatility of 3.70%.

Morphic's Global Opportunities Fund returned 0.75% in April, slightly under-performing it's benchmark (MSCI ACWI in $A) and recorded 25.08% over the previous 12 months with notable Sharpe and Sortino ratios.

The Laminar Credit Opportunities Fund returned 1.03% during April and 11.81% for the year, strong returns in a low interest rate environment.

FUTURE EVENTS

19-20 May in Sydney, IBR Conferences presents the Unit Pricing Forum. This is a 2 days forum exploring Unit Pricing operational challenges for 2014 & beyond. Topics include new APRA reporting requirements & implementation; impacts on unit pricing reporting and more.

Wednesday 21 May in Sydney: The Hedge Fund Association, in conjunction with Pricewaterhouse Coopers, is pleased to present an update on key regulatory matters currently affecting the alternative investment industry. A panel of Pricewaterhouse Coopers senior executives will provide a detailed overview of topics, as well as allowing for questions and commentary from attendees.

28-30 May 2014 in Sydney: IBR Conferences presents the Asset Allocation Conference. This event has been designed to both update and educate investors by taking an in-depth look at these more adaptive asset allocation strategies and practices and where the best opportunities for high return lay in the current climate.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different this week, maybe you saw this on the news, Tara the cat, latest American hero, I wonder if she has some budget suggestions?

On that note, I hope you have a safe and happy weekend.

Best wishes,

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.

I have always been of the view that politicians, and probably prime ministers in particular, should fade gracefully from the public eye on retirement, and just be happy with their generous entitlements, and excessively generous travel benefits.

My view is normally compounded whenever I hear Malcolm Fraser holding forth on what should be done by the current government. Having secured the largest majority (55) in federal history in 1975, and the second largest (48) in 1977 at the following election it is often argued that he did little with either prior to losing office in 1983. Notwithstanding that, and inexplicably losing his trousers in Memphis in 1986, he continues to snipe from the sidelines, well into his eighties, some thirty years later.

There are exceptions of course for exceptional PM's, and although Paul Keating has been known to air his views liberally, one has to take notice when he's commentating on Australia's superannuation system, of which he was the architect.  So his comments on the ABC's Lateline program this week on superannuation, the pension age, and the need for a Commonwealth insurance scheme for those who live between 80 and 100 are such an exception.

That interview is 24 minutes long and might be beyond the time limits of our readers, so this brief two minute excerpt from the Guardian.com might give you a flavour. In essence Paul Keating makes eminent sense. Not only did he call for an increase in the superannuation guarantee levy to 12% (in reality it probably needs to be 15%), but he also argues against the current call by Treasury and others for a reduction in the taxation benefits of super contributions.

Keating argues that a large majority of the population will not retire with a large nest egg, and that this will be the domain of those relative few with sufficient foresight and fortune to be able to make additional (tax friendly) contributions. His argument that they should be encouraged, rather than discouraged, stems from his belief that whilst it might be a benefit for the better off, at least it is producing an overall benefit to the economy by reducing their dependence on the system in later life.

More radical however is his proposal to have a national insurance scheme for those over 80. I have heard it quoted that 50% of the children born today are likely to reach 100, and no matter how high the current Treasurer wants to make the retirement age, the demographics of longevity, and the cost to the system, are massive. While not necessarily being the greatest fan of Keating when he was in office, it is hard to fault his logic, or his vision.

The reality is that for the majority of the population a 9% contribution by their employer to superannuation will simply not be sufficient to replace their dependence on welfare when they retire. Hence the attractiveness of not only making additional contributions, but also establishing a Self Managed Super Fund in an attempt to have some degree of control and independence over their financial affairs in retirement. It is little wonder therefore that many such self-directed retirees are supporters and investors in absolute return funds.

And on a slightly different Paul Keating note, one of my favourite little books, published way back in 1992 is a small paperback compiled by a Bookman Press containing 96 pages entitled "Paul Keating's Book of Insults". It's a gem, the colour and shape of a banana in memory of Keating's famous Banana Republic comment. I'm sure the current Speaker of the house Bronwyn Bishop would not have let him get away with many of his Parliamentary insults, but they still raise a chuckle.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

The Monash Absolute Investment Fund returned -1.3% in a volatile equity market. The Fund's 12 month record is strong at 24.77% with a vol of 9.11%.

In its fourth month of operation, and in a choppy equity market, Bennelong's Alpha 200 Fund returned -0.57% during April.

Updated FUND REVIEWS released this week included:

Insync's Global Titans Fund shows the Fund delivering  an annualised return of 10.36% and annualised standard deviation of 8.53% (since inception in October 2009) with sound risk-reward statistics.

Morphic Global Opportunities Fund - returned an annual return of 27.63%. Morphic's philosophy is that only funds with flexible investment and hedging strategies will be able to deliver acceptable, steady, real, absolute returns over the investment cycle.

Supervised Investments High Yield Fund is characterised by positive returns and very low risk. Since inception (April 2009) the Fund has returned 11.16% pa with a volatility of 2.22%.

FUTURE EVENTS

19-20 May in Sydney, IBR Conferences presents the Unit Pricing Forum. This is a 2 days forum exploring Unit Pricing operational challenges for 2014 & beyond. Topics include new APRA reporting requirements & implementation; impacts on unit pricing reporting and more.

Wednesday 21 May in Sydney: The Hedge Fund Association, in conjunction with Pricewaterhouse Coopers, is pleased to present an update on key regulatory matters currently affecting the alternative investment industry. A panel of Pricewaterhouse Coopers senior executives will provide a detailed overview of topics, as well as allowing for questions and commentary from attendees.

28-30 May 2014 in Sydney: IBR Conferences presents the Asset Allocation Conference. This event has been designed to both update and educate investors by taking an in-depth look at these more adaptive asset allocation strategies and practices and where the best opportunities for high return lay in the current climate.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different this week, while we talk of our politicians, at least most of us know if our previous leaders are dead or alive. Unlike these Americans.

On that note, I hope you have a safe and happy weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Last weekend one of our staff members participated in the Sutherland Shire 24 hour Relay for Life and walked a marathon to raise money for her team (Netty Girls) in memory of family members who have died from cancer. Click here to make a donation or watch a short video to see what all the fuss is about.

1 in 2 Australians will be diagnosed with cancer before the age of 85. All money raised through Relay For Life makes a difference in helping fund Cancer Council's critical research, prevention, education and support services. Relay For Life is a fun, outdoor overnight fundraising event that brings communities together to celebrate and remember the lives of those who have battled cancer. Teams take turns to walk or run around a track whilst enjoying entertainment, activities and heartfelt ceremonies.

This being the last edition of Hedge Clippings prior to the release of the new Treasurer Joe Hockey's first budget next Tuesday, it stands to reason that we may as well join the throng in both guessing what it might contain, and suggesting what it should, or could.

It goes without saying of course that whatever un-pleasantries the budget does contain will not be the fault of the Treasurer, but that of his predecessor from the opposite side of politics. And being his and this government's first budget it also goes without saying that they'll try to get the worst news out of the way as early as possible.

There seems little doubt that the government is intent on making some significant changes on both the income and expenditure side of the ledger, and the convenient timing of the release of the Commission of Audit Report containing 86 significant and in many cases electorally untenable proposals, will enable them to do so if they wish. However there is also a feeling that much of the measures mooted over the past couple of weeks may well just be a case of softening us up so that the news on the night elicits a collective sigh of relief.

There is also little doubt that both the revenue and expenditure lines, or the concepts and logic behind them, are in serious need of a shakeup. Welfare and government assistance should be aimed at the genuinely needy, not the greedy. Unfortunately over the past 20 to 30 years Australia has developed a welfare habit which it is struggling to break. At the same time demographic changes over the next 20 to 30 years will seriously increase government expenditure, particularly in the health and aged care sectors.

One political sacred cow which may, or possibly should, be considered for the chopping block is negative gearing on residential property, particularly given the housing affordability issues currently facing first-time buyers. The Australian superannuation system would also appear to be in the spotlight. While terrific conceptually, it has evolved over the past 20 years to be unwieldy, overly complicated, and as David Murray indicated yesterday in some preliminary comments on his Financial Services Inquiry, is excessively focused on the 40+ year accumulation phase, and not sufficiently on the subsequent 20 to 30+ year retirement phase.

On the income side the complexity of the taxation system, including superannuation, is extraordinary, and only increasing. One would have thought that increasing the GST would be the logical solution, given that Australia's 10% consumption tax rate is way below, and in some cases less than half the prevailing rate in many other developed economies. For some reason that appears not to be on the agenda.

All this is well and good, and I fear I'm likely to be disappointed on Tuesday. The big risk to the economy is not so much that the budget fails to fix the deficit, but that the increased taxation and expenditure cuts are so severe they damage the consumer confidence which is the lifeblood of any economy.

And the big challenge for the Prime Minister and the government is how to convince the electorate that a great big new levy is not in fact a great big new tax.

Specific PERFORMANCE RESULTS received this week include the following:

The Intelligent Investor Value Fund recorded a strong 24.63% over the previous twelve months as compared to the ASX 200 Accum return of 13.46%. 

KIS Asia Long Short Fund returned 0.70% during March with an annualised volatility of 2.67% (Index 11.03%).

The Laminar Credit Opportunities Fund delivered 0.62% during March and 11.52% for the year, with a low volatility of 2.72%.

Pengana Asia Special Events (Onshore) Fund returned 9.27% for the year with an annualised volatility of 3.22% and Sharpe ratio of 1.98.

The Cor Capital Fund returned -1.34% during March and 2.24% for the prior 12 months.

FUND REVIEWS updated this week included:

Bennelong Kardinia Absolute Return Fund - characterised by steady returns and very low risk. The Fund returned 0.87% during March and 13.57% p.a since inception (May 2006).

The Optimal Australia Absolute Trust - very low risk profile with an annualised standard deviation of 3.53% (Index 14.95%) and a Sharpe Ratio since inception of 1.73.

FUTURE EVENTS

19-20 May in Sydney, IBR Conferences presents the Unit Pricing Forum. This is a 2 days forum exploring Unit Pricing operational challenges for 2014 & beyond. Topics include new APRA reporting requirements & implementation; impacts on unit pricing reporting and more.

Wednesday 21 May in Sydney: The Hedge Fund Association, in conjunction with Pricewaterhouse Coopers, is pleased to present an update on key regulatory matters currently affecting the alternative investment industry. A panel of Pricewaterhouse Coopers senior executives will provide a detailed overview of topics, as well as allowing for questions and commentary from attendees.

28-30 May 2014 in Sydney: IBR Conferences presents the Asset Allocation Conference. This event has been designed to both update and educate investors by taking an in-depth look at these more adaptive asset allocation strategies and practices and where the best opportunities for high return lay in the current climate.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different this week, a fascinating look at the Honey Badger and the things that this one will do to escape his enclosure. Having watched it, we are wondering why they don't just let him go.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

This weekend one of our staff members is participating in the Sutherland Shire 24 hour Relay for Life and will be walking a marathon to raise money for her team (Nety Girls) and in memory of family members who have died from cancer. Click here to make a donation or watch a short video to see what all the fuss is about.

1 in 2 Australians will be diagnosed with cancer before the age of 85. All money raised through Relay For Life makes a difference in helping fund Cancer Council's critical research, prevention, education and support services. Relay For Life is a fun, outdoor overnight fundraising event that brings communities together to celebrate and remember the lives of those who have battled cancer. Teams take turns to walk or run around a track whilst enjoying entertainment, activities and heartfelt ceremonies.

This week I read an interview with Timothy Spangler, the US author of a book called "One Step Ahead: Private Equity and Hedge Funds After the Global Financial Crisis," in which he provided some interesting insights into the evolution of the managed funds sector, albeit with a very US centric slant and a focus on hedge funds.

To set the record straight I haven't yet read the book, (Amazon aren't that quick) but the interview covered a range of issues including the negative perception of hedge funds in the media, and thus by the general public; the lifting of restrictions in the US on advertising hedge funds to retail investors; and the difference between the asset managers who see their challenge as building assets, and those who see it as the single minded pursuit of performance.

Elsewhere the article covered the perennial debate between Long Only Benchmark Aware Investing vs. Absolute Returns. Of greater interest however was his view that hedge funds act as an effective magnet for talent, and as such their attraction to certain individuals from the long only, asset gathering side of the industry.

Maybe this struck a chord because this week Sean Webster and I had the opportunity to interview Simon Shields and Shane Fitzgerald from Monash Investors, two highly qualified and successful professionals who after 20+ years in the industry, and each at the top of their tree, took the bold step in mid-2012 of launching their own fund.

What intrigued us was why would two highly paid, award-winning, senior fund managers with excellent track records working for major institutions such as UBS, BT and Colonial First State step outside their comfort zone, both emotionally, professionally, and financially, to launch a long short start-up, and try to raise capital without the infrastructure and support provided at the big end of town?

The first response was probably predictable: They wanted to control their own destiny and make their own decisions away from their previous environments. Underlying this presumably was that as they progressed up the corporate ladder their roles became less focused on investment management, and more focused on internal corporate management.

Secondly, and equally importantly, they believed that long only management was no longer at the cutting edge of the industry, and that absolute return strategies provided greater flexibility to adjust investment styles to suit changes in the underlying market. They saw the ability to invest with true conviction, including the ability to short if necessary, and without the limitations of being fully invested in the market at all times, as being a more rewarding approach.

From a performance perspective it is early days yet for their Monash Absolute Investment Fund. After 21 months their annualised return is in excess of 26% with volatility of 7.53% and Sharpe Ratio of 2.76. Until the last three months this has been in a buoyant equity market, so the real test is yet to come. However having returned 8.32% year-to-date compared with the market's 2.09%, early indications are that their absolute return focus is holding its own.

Shields and Fitzgerald are of course not alone, and the absolute return and hedge funds space is typified by individuals leaving the comfort zone of a large corporate investment manager to strike out on their own and make a difference. Some, such as Sir Michael Hintze at CQS, and Kerr Neilson at Platinum, have gone on to not only provide excellent long-term performance, but also build significant businesses and reputations to match. Others have preferred to remain under the radar and focus less on asset gathering (frequently as a result of their specific strategy) and more on performance.

To come back to Spangler's interview, and presumably in his book when I get to read it, is that the absolute return and hedge fund industry acts as a magnet for talent. Markets may change and strategies may evolve, but it is the talent within the industry that will drive its future and success.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Bennelong Kardinia's Absolute Return Fund recorded a reasonable return in a flat market delivering 0.87% with the annual return 9.67%.

The Optimal Australia Absolute Trust returned 0.04% in March with an annual return of 3.30% and standard deviation of 1.89%.

Morphic's Global Opportinuties Fund returned -2.63% for March, slightly above the benchmark ACWI Index (in $A), with annual returns at 27.63%.

The Allard Investment Fund had a sound month returning 0.1% during March (Index -1.9%) and 9.69% for the previous 12 months.

Updated FUND REVIEWS released this week included:

Morphic Global Opportunities Fund, whose philosophy is that only funds with flexible investment and hedging strategies will be able to deliver acceptable, steady, real, absolute returns over the investment cycle.

FUTURE EVENTS

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different, just a week out from Easter. We're not quite sure how the Pope will react to this, or if the Church will now allow Priests to marry?

On that note, I hope you have a safe and happy weekend.

Best wishes,

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.  To celebrate the 20th anniversary of their #CBDGolf Escape! charity golf event, Cerebral Palsy Alliance are holding an online raffle. The prize will be a Toyota Yaris YR Hatch 3 Door, plus many amazing prizes inside the car - A total prize value of $22,000...See more

For more information visit www.cpresearch.org.au or contact me by email.

April fools' day came and went this week with little surprise, but luckily for the recently departed Assistant Treasurer, Arthur Sinodinos his appearance at the Independent Commission Against Corruption (ICAC) didn't occur until two days after. The media and others would have had a field day with the headlines covering the story.

For those not familiar with the details, Sinodinos received $200,000 a year to act as chairman of a company seeking a NSW state government contract to deliver water infrastructure to a growing region of Sydney's north west. As such his role took an annual total of 45 hours, or nearly $4,500 on an hourly basis.

Not a bad gig if you can get it, particularly as it only required him to be, in his words "a door opener", but it appears one without a very clear memory based on the number of times he couldn't remember or recall many details to assist the Commission. Adding to his memory lapse was that he forgot to mention to the NSW Premier, presumably one of the doors he opened, that if successful he was personally in line to pick up $20 million for his troubles.

Regular readers of "Hedge Clippings" might wonder if this is relevant to our weekly update on managed funds, but given that as Assistant Treasurer Sinodinos was until very recently the champion of changing the FoFA regulations, we think it is. What is relevant that he was trying to soften the FoFA legislation around conflicted remuneration (otherwise known as commissions) not strengthen them. If anyone was better placed, or more personally involved, to understand conflicts of interest I'd like to know who.

Having said there was a significant amount of misinformation and fear mongering in the campaign against the FoFA changes, but that in itself was caused by the lack of clarity and transparency on what the REAL effects would be.  And as the previously mentioned Sinodinos would now realise, transparency is essential if one is to avoid confusion, or misinterpretation. Unless of course clarity and transparency are not in your best interests.

This week's "and now for something completely different" is probably topical.

And now to matters financial. Equity markets both here and in the US saw very narrow trading ranges in March, with the S&P500 trading in a 49.3 point range even as it topped new highs. By comparison January and February ranges were 111.18 and 130 respectively. Meanwhile the ASX200 equivalent was 173 points in March, compared with 224 points in January, and 409 points in February. Volatility has collapsed accordingly, and given the concerns over the credit situation in China, military activity in Eastern Europe, and the growing realisation that interest rates can only rise, albeit possibly not for another 12 months.

Against this backdrop the ASX200 Accumulation index rose 0.29% in March to take the YTD return to just 2.08%. Early indication of March fund returns are significantly positive with the Monash Investment Fund the standout to date with an estimated +4.6%. 

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

The Pengana Australian Equities Fund recorded a 1.44% return during February 2014 and 7.30% for the preceding 12 months with a volatility of 6.41%.

The Monash Absolute Investment Fund returned a solid 4.6% during March (Index 0.20%) and 27.72% (Index 12.0%) over the last 12 months.

Updated FUND REVIEWS released this week included:

AFM's updated Fund Review for the Optimal Australia Absolute Trust  has been released. The fund is characterised by very low risk with an annualised standard deviation 3.55% (Index 15.07%) and a Sharpe Ratio since inception of 1.76.

Insync's Global Titans Fund Review shows the Fund delivering an annualised return of 11.33% and annualised standard deviation of 7.59% (since inception in October 2009) with sound risk-reward statistics.

Aurora Fortitude Absolute Return Fund - The Fund is characterised by steady returns and very low risk. Since inception (March 2005) the Fund has returned 8.12% pa.

FUTURE EVENTS

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different this week, although this clip is about a golf situation it presents a real-life dilemma regarding ethics. The real question is: What would the aforementioned Sinodinos do in this situation?

On that note, I hope you have a safe and happy weekend.

Best wishes,

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.  To celebrate the 20th anniversary of their #CBDGolf Escape! charity golf event, Cerebral Palsy Alliance are holding an online raffle. The prize will be a Toyota Yaris YR Hatch 3 Door, plus many amazing prizes inside the car - A total prize value of $22,000...See more

For more information visit www.cpresearch.org.au or contact me by email.

Who's buying the Aussie $??

There are a few people scratching their heads this week, wondering what's pushing the A$ towards US$0.93 when most of them are of the view that it's heading towards $0.83. Of course it may well be a temporary correction having fallen over 15%, or it might be a reflection that the market feels that the next move from the RBA will be up, even if not in the short term. Alternatively there's the view that there might be stimulus package in the offing in China in an attempt to head off a slowdown in the event of a credit crunch.

Whatever the reason, and whoever is buying, it is probably frustrating Australia's export efforts, as well as some local fund managers investing in global equities, as the rise in the A$ has been widespread. Many of those same managers have had the benefit of a falling currency adding to the returns from buoyant US equity markets, so March results from that sector will be of interest, especially given the inflows to some of the larger managers such as Magellan and Platinum over the past 12 to 24 months.

Meanwhile, this week Deloitte Access Economics released a report which focussed on the five industry sectors which they expect to drive the growth of the Australian economy over the next 20 years. Needless to say the financial services sector was one of them, along with gas, agribusiness, international education and tourism,  with a number of demographic and other factors behind the prediction. 

"With the combination of the world getting older and wealth in our region continuing to grow - wealth management services will continue to be in high demand," Deloitte wealth management leader Neil Brown said. "This offers the Australian industry the perfect opportunity to trade on its expertise and the probity of its wealth management sector."

By 2030, three billion people in Asia will join the middle class and by 2050 the region will account for more than half the world's financial assets. Brown said this combination, together with Australia's domestic success in building the fourth largest superannuation asset pool in the world, is an attractive proposition to both the domestic and the growing Asian middle classes.

We certainly concur regarding the opportunity for the financial services industry, with technology and communications reducing Australia's previous limitations of distance. However potential is one thing, achieving it is another. If Australia is to succeed in the financial services sector on a global rather than merely a local stage, the structural and regulatory environment has to be in place, including a level taxation playing field for offshore investors.

In that regard the Financial System Inquiry headed up by the former head of CBA David Murray is perfectly timed to make appropriate recommendations when it reports to the Treasurer in November of this year.  This week the government announced the addition of four overseas members of the inquiry, including Sir Michael Hintze, one of Australia's most successful hedge fund managers whose $13 billion CQS Global Multi Strategy Asset Management business is based in London.

While confident that David Murray and his panel will come up with the solutions, the challenge will be to see if the current Government implement their findings. Sadly their predecessor's failed to make the most of the opportunities provided by the the Henry Tax Review, and Mark Johnson's "Australia as a Financial Centre" report before it.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Auscap's Long Short Australian Equities Fund had strong performance during February to return 5.32% (ASX 200 Acc 4.97%) bringing annual returns to an impressive 58.90% (Index 10.56%).

The KIS Asia Long Short Fund returned 1.76% during February and 15.99% (10.56% Index) for the previous twelve months with a volatility of 2.71% as compared to 11.49% for the ASX 200 Acc Index.

Pengana Asia Special Events (Onshore) Fund recorded 0.48% during February and 11.76% for the preceding twelve months with a very low standard deviation of 2.39%.

The Cor Capital Fund benefited from buoyant asset markets to return 2.34% during February with positive performances from all the underlying assets. .

Laminar's Credit Opportunities Fund returned 0.57% during February and a creditable 11.93% for the prior 12 months with a volatility of 2.71%.

Updated FUND REVIEWS released this week included:

Bennelong Kardinia Absolute Return Fund. The Fund is characterised by steady returns and very low risk. The Fund returned 2.69% during February and since inception (May 2006) the Fund has returned 13.85%

FUTURE EVENTS

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

Tuesday 1 April 2014: The Future of Financial Services Regulation breakfast seminar at Cockle Bay, Sydney. At this upcoming Leaders Series breakfast, Money Management and Super Review will bring together key players involved in this inquiry, including the deputy chairman of ASIC, Peter Kell, and one of the politicians at the centre of the Parliamentary Inquiry into ASIC, Senator David Bushby. They will provide unique insights into what the future of the financial services regulator will look like and the implications which may flow from the Financial Systems Review.

Tuesday 1 April 2014: AdventConnect 2014, Sydney. Stay up to date on industry trends with fresh insights from industry thought leaders, fund managers, and the executive management team at Advent Technology. Also in Melbourne on Thursday 3 April.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different this week, perhaps you use some medication? Have a laugh at Mr Bean.

On that note, I hope you have a safe and happy weekend.

Best wishes,

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.  To celebrate the 20th anniversary of their #CBDGolf Escape! charity golf event, Cerebral Palsy Alliance are holding an online raffle. The prize will be a Toyota Yaris YR Hatch 3 Door, plus many amazing prizes inside the car - A total prize value of $22,000...See more

For more information visit www.cpresearch.org.au or contact me by email.

FoFA stalls, QE falls, Taper and the new era of the dot plot.

In the first Hedge Clippings of 2014, way back in mid-January, we wrote that we had polled a number of fund managers on their views of the market's direction for 2014. The general consensus was for a more subdued return than in 2013 but with higher volatility, and in that regard they were spot on. Year to date the ASX200 has gone nowhere, although it has hardly flat lined, after falling over 3% in January, rising almost 5% in February, and falling a further 1.6% so far in March.

For the record, in 2013 the 12 month rolling return of the ASX 200 Accumulation Index only fell below 20% for one month (in March, and even then it was 19.98%) while in May it reached an impressive 26.5%. By comparison in the first two months of 2014 the rolling 12 month performance in January was 11% and 10.6% in February. Month to date in March the twelve-month return is 11.31%.

It would seem that the fund managers we spoke to in January got it right, at least so far. However it does mean that if the market is to repeat the 20% returns enjoyed in each of the last two years it will need to get a move on, with almost one quarter of the year already history.

Changing tack, in more ways than one, the proposed changes to FoFA would appear to have stalled as the Bill amending the legislation has been referred to a Senate Economics Committee enquiry which is not expected to complete its task until mid-June. Coupled with the upcoming Murray enquiry into the financial system, due to release it's interim report mid-year, with the final report expected to be delivered in November, the potential for a changing landscape is considerable - or should that be inevitable?

And on the subject of changing landscapes, overnight the new chair of the US Federal Reserve, Janet Yellen, confirmed the continuing unwinding of the great ongoing experiment known as Quantitative Easing, with the third consecutive monthly reduction, or Taper as it has become known. Expectations are now that QE will be a thing of the past by October or November this year, while expectations for a tightening of interest rates in the US have increased, albeit only marginally, by the end of 2014, but with a more significant shift in expectations for both 2015 and 2016.

In doing so Yellen has introduced into every day financial speak the concept of the dot plot as a way to graphically illustrate the expectations of the individual FOMC participants for the timing and extent of the inevitable start of rate hikes. As someone who much prefers to look at a picture that paints a thousand words than having to read and then hopefully understand them, I'm rather taken by the dot plot and its graphical simplicity, even if Yellen suggested that we should not pay it too much attention.

The bottom line was that there has been a shift - marginal but quite pronounced - in FOMC expectations for a tightening. Even so, more than half the FOMC participants expect the Fed funds rate to still be 1% or less by the end of 2015. The problem is that with everyone hanging on every word Yellen utters it is inevitable that her suggestion not to follow the "dot plot" too closely is likely to be ignored, and I would be very surprised if we don't hear a great deal more of the term going forward.

While on the subject of looking forward, keep an eye out for natural gas prices in the US which have jumped sharply on the back of President Putin and his slightly clumsy attempt at democracy for the Crimea; a sharp rise wheat prices, and even more alarming, the price of coffee on the back of the drought in Brazil forcing up the price of my multiple daily doses of caffeine. 

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Totus' Alpha Fund has taken full advantage of the buoyant equity markets over the last twelve months to return 51.45% over that time. The fund returned 1.44% during February.

The Pengana Australian Equities Market Neutral Fund returned 2.90% during February with a net market exposure of 2.7%.

Insync's Global Titans Fund benefited from stronger equity markets during February returning 2.39% and 24.17% over the year with a notable down capture ratio of -0.84.

The Paragon Fund returned 3.80% for February, with a net exposure of 73.6%, and 21.72% (10.56% ASX 200 Acc Index) for the previous twelve months. Over this time average cash holdings were 35% contributing to the lower volatility number of 7.56% as compared to the Index 11.49%.

Intelligent Investor's Value Fund returned 0.48% in February and a very sound 31.94% for the year to end-February (ASX 200 Acc Index 10.56%).

FUTURE EVENTS

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

Also in Sydney on 27-28 March 2014: Operations Risk Management and Mitigation seminar enables participants to prepare and manage the planning and implementation of operational risk management processes.

Tuesday 1 April 2014: The Future of Financial Services Regulation breakfast seminar at Cockle Bay, Sydney. At this upcoming Leaders Series breakfast, Money Management and Super Review will bring together key players involved in this inquiry, including the deputy chairman of ASIC, Peter Kell, and one of the politicians at the centre of the Parliamentary Inquiry into ASIC, Senator David Bushby. They will provide unique insights into what the future of the financial services regulator will look like and the implications which may flow from the Financial Systems Review.

Tuesday 1 April 2014: AdventConnect 2014, Sydney. Stay up to date on industry trends with fresh insights from industry thought leaders, fund managers, and the executive management team at Advent Technology.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different this week, it has been a long time since I have had any interaction with a bouncer, and when I did I'm sure I was blameless (?) so "giving bouncers a taste of their own medicine" struck a chord!

On that note, I hope you have a happy, safe and bouncer free weekend.

Best wishes,

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.  To celebrate the 20th anniversary of their #CBDGolf Escape! charity golf event, Cerebral Palsy Alliance are holding an online raffle. The prize will be a Toyota Yaris YR Hatch 3 Door, plus many amazing prizes inside the car - A total prize value of $22,000...See more

For more information visit www.cpresearch.org.au or contact me by email.

Last week's Hedge Clippings focussed on the Australian market's exposure, and Australian investors' love affair with the big four banks, or at least their dividend yields. In particular we noted the difficulty that value-based managers were having finding quality companies (which the banks undoubtedly are) that have the potential to continue to provide dividend growth, while still trading below their intrinsic value.

One theme that came out of this was the falling levels of market exposure that many absolute return managers currently have to domestic equities. Of course this is both a problem, and an opportunity, that long only index tracking fund managers don't have as their mandates require them to be fully invested irrespective of the market's direction.

Generally the managers that AFM monitors raise or lower their market exposure depending on their outlook for the market. Some may increase exposure through increased leverage (although this is a relative rarity compared with pre-GFC levels) or by reducing short exposure. At other times when the risk outlook appears excessively high, or when they see the opportunity, reducing exposure to the market might be achieved by increasing short positions.

However consistent with the theme that while not excessively overpriced the market is not exactly cheap, is the current trend for a number of managers to hold higher levels of cash, with some current examples approaching and possibly exceeding 30% of NAV. For value based managers who consistently refuse to overpay for an asset simply because everyone else is doing so, this tactic is simple risk avoidance.

If one assumed that this is particularly prevalent amongst large cap and high yield strategies, think again. There are a number of small to mid-cap specialists who are finding opportunities for value investing outside the ASX100 or 200 increasingly difficult following some recent stellar share price gains. Against this there are more companies to choose from, although the undervalued gems are difficult to find.

Irrespective of market sector, what we are seeing and hearing is that many managers are experiencing a decreased opportunity set following two or three years of strong gains. While some investors may question paying management fees of 1 or possibly 2% of NAV when 30% of the fund's assets are held in cash, this would seem preferable to being 100% invested in fully, or overpriced stocks when the unexpected occurs.

Or as Benjamin Disraeli pointed out "what we anticipate seldom occurs, what we least expect generally happens."

Think Crimea. Or a slower than expected economy in China.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Bennelong's Long Short Equity Fund returned 2.50% in February and 20.61% since inception in January 2003 with below Index volatility.

The Bennelong Kardinia Absolute Return Fund had a strong February (2.69%) making the most of the buoyant equity markets.

Morphic's Global Opportunities Fund returned -0.71% during February with a net exposure of 101% and gross exposure of 157%.

The Optimal Australia Absolute Trust returned 1.06% during February with a net exposure of 3.1%, a 12 month return of 3.20% and volatility of 1.90% (11.49% Index).

Allard's Investment Fund increased 0.2% during  February 2014. The 2.0% appreciation of the Australian dollar, detracted from the Fund's performance.

FUTURE EVENTS

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

Also in Sydney on 27-28 March 2014: Operations Risk Management and Mitigation seminar enables participants to prepare and manage the planning and implementation of operational risk management processes.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different this week, it's Billy Crystal's birthday today, so to celebrate here's a clip from one of his early stand up routines.

On that note, I hope you have a happy and safe weekend.

Best wishes,

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.  

Cerebral palsy is the most common physical disability in childhood. But despite the incidence of CP, on average only $1 million is invested into CP research each year. To put that into perspective, Australia spent over $10 million on New Year's Eve fireworks last year. We're not suggesting that fireworks money should be spent on CP research, but it just goes to show how drastically underfunded research into cerebral palsy is.

For more information visit www.cpresearch.org.au or contact me by email.