June saw a continuation of positive results for the Australian absolute return and hedge fund sector, largely on the back of an ongoing rally in equities, particularly the ASX 200. Although AFM's index was positive, outperforming the S&P 500 and the MSCI World ex Australia index, it underperformed the ASX 200 which rallied 3.59% as confidence continued to flow back into investors.

For detailed analysis of performance for each strategy, industry comment and ranking tables, please open the attached .pdf file.

ATTACHED FILESJuly 2009 absolute return and hedge fund review (pdf format)

Foreign exchange specialist Excalibur Funds Management completed its three year track record in June. The Absolute Return Fund which uses a combined systematic and discretionary investment process has an annualised return of 19.7%.

The manager makes extensive use of options to protect downside risk. "It's been a tough environment in currencies over the past 12 months, we've really had to focus on managing the risks for investors," commented Excalibur principal Matthew Harper. The Fund has a three year risk adjusted return (Sharpe ratio) of 1.37.

Excalibur received strong inflows during the month with assets under management topping AUD$100mn. A further AUD$40mn of capacity has been locked in by a Hong Kong based Fund of Fund. The manager plans a hard close at AUD$300mn.

Three new Funds have commenced reporting this month, two focused on Asian Equities, the third on Global Macro trading strategies.

Pegasus Absolute Returns Fund

Pegasus uses fundamental and technical research to establish arbitrage and spread positions in physical and derivatives markets. The portfolio is managed by Andrew Lythgo who was formerly with Bankers Trust Australia and also a private trader (local) on the floor of the Sydney Futures Exchange. Pegasus's management include Russell Johnson, managing director of Sonray Capital Markets and Tony O'Grady formerly General Manager of NAB custodian services.

Kima Capital Pan Asian Long/ Short Fund

Kima is a multi-strategy Asian Long /Short Fund managed by Justin Klintberg. The Fund is targeting 15% returns with low volatility using Arbitrage, Event Driven and IPO/ Secondary Block strategies. The management team includes Michael Gallagher, formerly head of equities at RMB Australia and Nishant Narayanaswamy formerly with ANZ Investment Bank. Prior to starting Kima Capital, Justin spent 7 years with Marble Bar Asset Management managing Long / Short equities strategies.

QIC Asia Pacific Market Neutral Fund

QIC's Asia Pacific Market Neutral Fund uses a quantitative systematic investment process to select a diversified portfolio of Asian equities. The Fund has a mandate to select stocks from a very broad universe across the entire Asia Pacific region. The investment team includes Michiel Swaak, formerly a Founding member and Associate Director of Macquarie's MQ Asset Management , Joe Cole and Tim Sharp. The Fund has been seeded through QIC with AUD$20 million.

Australian based Absolute Return and Hedge Funds continued their outperformance during May, returning an average of 2.69% across all strategies based on 71% of results to hand. This was the third consecutive month of positive returns, bringing 2009 YTD returns to +5.91%, and 12 month performance to -10.79%.

For detailed analysis of performance for each strategy, industry comment and ranking tables, please open the attached .pdf file.

ATTACHED FILESJune 2009 Absolute Return and Hedge Fund Review (pdf format)

Australian based Absolute Return and Hedge Funds recorded a second consecutive positive month in April of 2.71% on the back of the ongoing global rally in equity markets.

Not surprisingly equity based strategies were the best performers, but with the exception of Managed Futures and Market Neutral, all single strategies recorded a positive month. The overall index of single funds returned +3.03% (based on 88% of results mtd) against the ASX200’s performance of +5.54%.

For detailed analysis of performance for each strategy, industry comment and ranking tables, please open the attached .pdf file.

ATTACHED FILESMay Absolute Return and Hedge Fund Review (pdf format)

Australia's regulator, ASIC, has lifted the limit on the covered short selling of financial stocks which was originally imposed on 21 September 2008 as part of the overall ban on short sales.

In reaching  the decision, ASIC noted that the global financial crisis and global recession continues to place pressure on Australia's markets', and that they 'will not hesitate to reimpose the ban immediately ... and without consultation if it considers market conditions warrant such action. ASIC will, in its monitoring of the market along with ASX, pay particular attention to short selling activity by participants (including activity by hedge funds and similar institutions) which could potentially harm Australia's financial system.ASIC also advised that the daily reporting of gross short sales would continue, as would the publication of aggregate short sale statistics the day after trading, until the commencement of the Government's permanant disclosure levels, which have yet to be announced.

The strong rebound in equity markets both in Australia and overseas saw Equity based hedge funds managed in Australia post not only their best returns this year, but for the past three years. When taking the results of all funds - including non equity strategies such as Global Macro and Commodities, and including funds of funds, it was the best result since the start of the Global Financial Crisis in late 2007.

For detailed analysis of performance for each strategy, industry comment and ranking tables, please open the attached .pdf file.

ATTACHED FILESAFM March 2009 Performance Review (pdf format)

In a move that probably surprised no one just a week out from the Federal Government's budget due to be announced next Tuesday, the RBA has left rates on hold at 3.0 per cent.

In announcing the decision the RBA noted that although the economy both locally and globally has continued to contract in the first few months of the year, there are signs of stabilisation in several countries, and a pick up in China and in several commodity prices.

The announcement also noted the gradual improvement in global financial markets, with equity prices off their lows, term spreads declining and capital markets re-opening. Against this they noted a continuing fragility in confidence and ongoing pressure on balance sheets, along with tight credit markets.

The Bank sees inflation reasonably contained, with labour markets likely to weaken further, although imported goods are likely to balance this out somewhat given the weak exchange rate.

The Bank included their usual caveat that they will "continue to monitor how economic and financial conditions unfold..." when considering any further reductions in the cash rate are required.  Our guess is that there's not much room to move on the downside from here barring further major problems emerging from the GFC.

With just over 20% of single manager results to hand, early indicators are that performance from Australian absolute return funds in March was positive, although as might be expected, well below the stellar performance of the ASX200 and the S&P500 in the US.

Equity based funds reporting to date returned 2.61%, with non equity funds returning 0.86%.

Equity markets showed extreme volatility, as can be seen from the SPI futures contract which started the month by falling 8% only to promptly rally by 24% from the lows to close the month with a gain of 10%. Much of the rally was focused on just 8 stocks, with the big four banks, Macquarie and Wesfarmers, along with BHP and RIO, accounting for over 80% of the gains made in the ASX200.

Not surprisingly some equity based managers who have suffered in the bear market of 2008 produced excellent returns, with PM Capital’s Opportunities fund leading the pack with a return of 14.9% for the month, and Pengana’s Australian Equities long/short bringing home 7.60%. St Helen’s Arran fund returned 6.55%, bringing YTD to 9.44%, and 12 month performance to +3.35%.

As equity markets around the globe continued to be buffeted in February, Australia’s Absolute Return and Hedge Fund industry slipped into the red, collectively losing 1.6% for the month, and erasing January’s gains to be down 1.21% for the year to date, based on 78% of local funds returns.

Against this the S&P 500 index in America lost 10.99% in February to bring year-to-date losses to minus 18.62%, while on the local front the ASX 200 lost 5.54% to show a cumulative decline in the first two months of 2009 of 10.15%.

When put in perspective, 48% of the over 200 funds listed in Australian Fund Monitors index of hedge funds have produced a positive return in the first two months of 2009, with 84% of all funds outperforming the ASX 200.

The results, whilst not universally positive, again showed that in times of adversity hedge funds, far from being the speculative vehicles that they are frequently portrayed as, provided diversity and significantly better risk profiles than equities alone.

For detailed analysis of performance for each strategy, industry comment and ranking tables, please open the attached .pdf file.

ATTACHED FILESAFM February performance review (pdf format)