In this issue:

• New website
• 2012 Fund Results
• Japanese End Game
• Performance Fees
• Shaken not Stirred

We're back after the Christmas & New Year break - greatly and gratefully refreshed, and relishing the challenges and opportunities of 2013. The break wasn't all sun, sand and swimming though. Those of you who have visited our new website over the past few weeks will have noticed significant changes, including a new look and feel with additional content and free access to the Fund Selector, Fund Profiles News and the Library. Feedback from users has been positive, but further suggestions or comments are always welcome.

Looking back, 2012 was dominated by macro risks combined with politics and politicians - never a good mix. However the immediate threats to Europe were resolved by the "whatever it takes" approach, the US stepped back from the fiscal cliff and there does seem to be a recovery of sorts underway, and China appears to have avoided the hard landing scenario many were fearing.

Australia's equity gained 14.6% in 2012, and 20.2% on an accumulation basis with most of the gains coming in the final six months of the year as global risks subsided and interest rates fell to historical lows, leading to a search for yield which resulted in the big four banks and Telstra gain 30 to 40%, while the materials sector struggled. In this environment equity based hedge funds averaged gains of 12.18% with the best performing fund returning over 50% and the worst falling more than 40%. Manager and fund selection remains vital!

It seems unsurprising therefore that markets are experiencing a definite change to "risk on" based on feedback from a range of fund managers and investors. However that doesn't mean there aren't significant risks remaining, as some of the issues have just been deferred. Concerns remain in Australia that the price side of the P/E ratios have moved and there may be some delay in earnings. Another risk on the horizon seems to be the advent of the currency wars as the US, Europe and now Japan all compete to drive their currencies lower.

This article from macro manager Blue Sky Apeiron outlines their views on the possible outcomes and dangers that Japan's new policies are creating. Interesting and sobering, and if their suspected scenario comes to pass Australia will feel the effects given Japan's position of our second largest trading partner.

Elsewhere one of the major challenges the absolute return sector faces is the necessity to provide value in return for the fees charged. Downward pressure on fees continue, but this article in AFM's "Understanding Hedge Funds" series argues that it is not merely the size of the fees but the way they're structured that will come under scrutiny. We remain firmly of the view that paying high fees for the best managers is a sound investment, and paying fees for poor performance should lead to a change of manager.

And now for something completely different. Personally I have never enjoyed drinking exotic cocktails, but seeing the skills involved in making them might be a different matter - even in Russia.

Have a good week-end.

Regards,

Chris.

One of the UK's fastest-growing hedge funds is slashing its fees, in a move that it hopes will spark a rethink of the industry's notoriously high charges.

The new Core Macro fund being set up by Cambridge-based Cantab Capital will employ similar trading strategies as funds from Man Group, Winton Capital and BlueCrest, three of the world's biggest hedge funds that manage $100bn between them, but at half the cost to investors.

Welcome to the last edition of Hedge Clippings for 2012. It has been an eventful year here at AFM, but I guess when you're monitoring over 320 actively managed and absolute return funds that's always going to be the case.

First up, today we have released a new version of the Fund Monitors website. We hope you find it an improvement, but feel free to provide feedback (good or bad) and comments. If you're a previous user we suggest you press 'control + F5' on your keyboard to clear any cobwebs from the previous version. The new website will build and expand on coverage of fund performance and news feeds, including videos and research library.

Secondly, in October we launched an investable version of the E5 Equity Model Portfolio which we had used to track the performance of a small group of Australian actively managed equity funds. Over the previous five years the model portfolio had returned close to an annualised 15% with a volatility of less than 6%. Branded the AFM Prism Active Equity Fund, it is open to wholesale and sophisticated investors with a minimum investment of $250,000.

From a staffing perspective we welcomed a new administration manager (not my strongest suit), Alexis Scott who has transformed the office, but is still working on my time management. I think it's a case of the difficult we do at once, with the impossible taking a little longer. In January we look forward to welcoming a new Head of Research, and in February will launch the Prism Select Portal that will include selected research on 'best of breed' funds, with interactive online application functionality and reporting.

Meanwhile although there's still one month's data to come, year to date performance has ranged between great, good, ok, average, poor and unacceptable. All this does is confirm the diversity and range of funds, and skill of the various managers. YTD the best performing fund has returned investors 62% while the worst has fallen by -40%. In round terms just over 80% of funds have provided positive returns, while 30% have outperformed the ASX200.

Making it doubly difficult for investors is that many of the best performers have lifted their returns after a difficult few years, while some of the more disappointing had previously avoided risk in more troubled markets. Some, and we would argue the best, have provided the consistency of good risk adjusted returns year in and year out. Our 2012 Fund Review due out in late January will sort the wheat from the chaff.

And 2013 will probably see more of the same - a variety of performance and risk, no doubt with more new entrants and a few calling it a day. Life goes on, and we are eagerly looking forward to it. Maybe, hopefully, next year will see less political influence on the macro scene than the one just (almost) past.

And on that note I'd like to wish all readers compliments of the holiday season, and a happy, healthy and prosperous New Year.

Regards,

Chris.

Australian Fund Monitors (AFM) www.fundmonitors.com provides the most comprehensive source of data and information on Absolute Return, Hedge Funds and Alternative Investments in Australia.

Performance and Industry News will be updated weekly.  We are also releasing a series of videos on Understanding Hedge Funds, with Fund Manager interviews to be added to the video showcase in 2013.  Please watch the first video, which explains what a Hedge Fund actually is, by clicking here.

You can navigate through the site by either the Menu Bar in the header, or by using the icons at the top of each page.

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Enjoy your Summer holidays!

We would like to take this opportunity to wish all our visitors and clients a very merry Christmas and safe and happy holiday season.  We look forward to a prosperous 2013!