Looking over the Australian hedge fund industry numbers, home-grown managers did well. Australian market neutral equity funds returned a creditable 12.05 per cent (November year to date) with near bond-like volatility of just 8.6 per cent (as measured by annualised standard deviation). Long/short equity achieved a higher 28.51 per cent return on 15.98 per cent std dev. Overall, our universe of 150 Australian hedge funds (including several offshore hedge funds offered in Australia) returned 16.95 per cent year to date on a relatively low 13.55 per cent std dev.

How can this be, especially when hedge funds are perceived to be “high risk?” The answer is that the “risk” refers to enterprise risk. There are low barriers to entry, and so many fund businesses are called “hedge funds”. But few are chosen. Half of hedge fund flows come from fund of fund groups. These groups rarely make it to Australia to invest in local managers. Local investors tend to go offshore for managers. So unfortunately, Australianbased managers seem to miss the boat completely. This is a shame as local funds offer a wide range of strategies and volatility profiles.

Take for example, low-volatility equity funds. Eight out of 12 market neutral hedge funds in our database exhibited annualised std dev of less than 8 per cent. Six out of seven multi-strategy hedge funds had std dev of less than 9.5 per cent, and an average return of more than 18 per cent. At the other end of the spectrum, extreme performance “risk” is also available, with four funds exhibiting std devs of more than 40 per cent. The key point to note is that there is a wide range of hedge funds to choose from.

And with practically anyone able to call themselves a hedge fund, there is plenty of room for misinformation and even fraud. So due diligence is critical in capturing the benefits that hedge funds can bring into a portfolio. Speaking of due diligence, my firm Hatfield Advisors has joint-ventured with Triple A Partners, a leading hedge fund consulting firm based in Hong Kong. As of December 2009, we have changed our name to Triple A Partners Australia. Triple A Partners has affiliate offices in London, New York, Santa Monica, Seoul, and Tokyo. Triple A also has a joint venture fund-seeding business with Penjing Asset Management which is also located in Hong Kong.

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