The MM&E Capital Investment Trust No. 1 was up +0.26% in March, following on from gains in January and February.

Successful closeouts of positions in St George Convertible Preference shares as well as a share placement in AXA Asia Pacific pushed the Fund to a positive result for March. The Fund was also able to avoid two notable failed deals during the month, OZ Minerals and Adelaide Managed Fund Asset Backed Yield Trust.

The MM&E Capital Takeover Target Fund also recorded a gain in March, up +1.83%. The Fund remained underinvested for the month, causing it to underperform the market which gained approximately 7%. Positive returns came from positions in BOQ and Santos, while the Fund also profitably closed out a position in AXA Asia Pacific. Negative returns came from Healthscope, which was closed out during the month, and Lion Nathan. The manager will look to increase the level of investment by the Fund over the next few months.

The Austral Equity Fund made a small gain in March, up +0.57%, following on from similar returns in January and February. The Fund remained defensively positioned in equities due to ongoing volatility.

The manager noted global equity markets rallied in March, up around +7% with a notable decrease in capital raisings, which had previously held back market gains. The Fund will remain defensive in equities while economic conditions remain poor and while balance sheet and liquidity disclosures remain inadequate.

The Fund did however increase its exposure to credit markets, specifically to short duration corporate credit, while maintaining existing positions in Macquarie Airports Tickets. At month end the Fund had a 37.5% exposure to interest rate securities and a 60.3% cash position.

The Attunga Agricultural Fund was up +3.73% in March, while the Enviro Opportunities Fund gained +4.51%. Attunga's offshore fund posted the strongest return, up +6.9% for the month.

Agricultural markets ended March higher, the Agricultural Fund benefiting from higher soy prices (due to tigher supply in the US as well as ongoing concerns over production in South America) in particular. Volatility spreads in corn, wheat, canola and soybean oil options also provided positive returns for the Fund.

March was characterised by significant falls in carbon affected electricity contract prices for the Enviro Opportunities Fund. With the Federal Government's Carbon Pollution Reduction Scheme (CPRS) due to be rolled out from July 2010, the electricity curve needed to factor in a carbon component however carbon prices fell dramatically during the month. Electricity contracts were slow to react to this, and this combined with the growing policital risks surrounding the CPRS and the impending start date conspired to reduce carbon-electricity spreads. The manager noted that the CPRS may cause an increase of approximately 85% of the cost of a tonne of carbon. They also noted that with plenty of debate ahead for the CPRS there will be many trading opportunities for the Fund.

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)

The Aurora Property Buy-Write Income Trust posted its fifth consective month of positive returns, up +0.17% in February.

The Trust, which generates income from writing call options over Australian REITs, recorded this result in a month where REITs underperformed the broader equity index by -11.8%. The manager noted with approval the reduction of target debt levels in the sector, as well as the scaling back of operations to the REITs core businesses (passive rent collecting) and ongoing transparency in reporting.

Another Aurora fund, the Buy-Write Income Trust, gained +1.08% in February. Calls written over Westpac which were exercised during the month produced a positive return, and written calls over Telstra, Newcrest and NAB among others provided additional income. The Trust maintained a high level of cash (ending the month at 76%), and the manager believes the fund will become more invested over the medium term.

The Black Marlin Fund, managed by Shell Cove Capital Management, was down a disappointing -15.61% in February on the back of two mistimed short dated long option volatility positions which were held to expiry. This result brings the Fund's 2009 return to -17.6%, following a positive return in 2008 of +29.15%.

The Fund's US long bond volatility position lost -6.25% during the month, and its resource volatility long position was down -5.93%, which were the main contributors to the overall result. Despite this the manager expressed confidence that their "long volatility strategy will provide positive returns in the future, as it has in the past, although expiry profiles will need to be managed carefully."

Asia Pacific Asset Management's Absolute Equity - Asia Fund, which was consolidated with APAM's Absolute Equity - Australia Fund at the end of January, lost -0.31% in February.

The manager carried out some significant portfolio rebalancing during February as a result of the consolidation. The Fund reduced its exposure to Australian assets, while significantly increasing exposure to Asian hybrids, as well as China-related equity markets. Negative returns came from falls in the markets in Japan and Singapore, although China A-shares gained +4.63%. No specific sector recorded a gain, in fact financials, healthcare, consumer staples and industrials each lost over -10%.

Although there are still net outflows being reported by some Australian Hedge Funds, it appears that December was indeed the peak of redemptions, with one of Macquarie's funds reporting net inflows for the beginning of March for the first time since July last year.

Funds with offshore investors were hardest hit towards the end of 2008 as redemptions were based more on the investors' own liquidity and risk issues than on the underlying manager's performance - although those with particularly poor performance were punished accordingly. With the Madoff related issues hitting fund of funds - especially those with exposure to his 20 year Ponzi scheme - many both received and made record redemptions up to the 31 December deadline.

Further liquidity issues being faced by investors have continued in isolated cases in 2009 - with some of the best performing managers with positive returns over the course of the past year receiving redemptions from liquidity stressed investors.

Against this there are signs the corner has been turned. Macquarie Bank's MQ Asia fund reported net inflows in March following a horror stretch of outflows in the second half of 2008, and other funds are reporting positive signs that investors are returning from the sidelines. AFM are also noticing an increase in site visits and interest from offshore investors from both Asia, Europe and the USA.

The Commodity Strategies Long Only Fund gained +0.21% in February, and is up +0.74% in 2009, while the Long/Short Fund lost -0.26% but is up +1.20% YTD.

The February return for the Long Only Fund was mainly influenced by returns (positive and negative) in metals - nickel and zinc providing strong gains, offset by losses in platinum, silver (NY) and wheat red (KBOT).

The Long/Short Fund, which is leveraged 1.5 to 1 for long positions and 0.6 to 1 for short positions, made significant losses in zinc and nickel, among other commodities. Positive returns in platinum, cotton and cocoa were not enough to prevent an overall negative return for the month.

After almost six months of investigations, Australia's corporate regulator ASIC has finally claimed a scalp - that of a 32 year old stockbroker, Richard Macphillamy, who emailed clients at the height of the market panic just 2 days after the collapse of Lehman's to warn of a run on Macquarie Bank's cash management trust (CMT).

The ban comes 12 months after ASIC announced Project Mint, designed to stamp out illegal market manipulation, and while they are themselves rumoured to be working on additional cases, there are some interesting aspects to the case.

ASIC stated that "in Macphillamy's favour is the fact that there is no evidence that he had any dishonest purpose or manipulative behaviour."  At the time, Lehmans had collapsed two days before, UBS had issued a downgrade on Macquarie a few weeks before, and JP Morgan issued a report the day after stating that Macquarie's model was "irretrievably broken."

No doubt the question will be asked in many brokers' offices what their job is, if not to inform clients about market "information"?  We suspect there will be a very fine line between information and rumour, and as John Durie of the Australian noted in today's edition "if the guy was just passing on the market gossip of the day, his penalty is too harsh - in fact you wonder why he was even hauled over the coals."

ASIC needs to find a party that has actually done what they are looking for - maliciously spreading rumours known to be false with the intent of profiting from the resultant price move.  And make sure it is enforced in both bull AND bear markets.