Australian hedge funds (including offshore funds sold in Australia) returned a positive 0.62 per cent in July 2010, but year-to-date performance was minus 0.84 per cent.

The long/short equity sector led the industry with a 2.34 per cent return for the month. Fixed income continued to perform well with a 1.41 per cent return for July and 5.26 per cent year-to-date, ranking it as the best performing strategy within the Australian hedge funds space. Global macro/commodities/ managed futures was the laggard with a minus 1.78 per cent return in July. However, the result was skewed by five high-volatility funds each with minus 10 per cent+ returns during the month, although most have produced attractive compounded annualised returns since their inception.

This sector is the only one that consistently performed above cash for three years running in 2007- 2009, including the GFC of 2008. Global macro/commodities/ managed futures is also the largest strategy grouping in Australia with 43 funds on offer, eclipsed only by long/short equity strategies with 57 products. I believe this sector, particularly managed futures and macro, has come of age. My view was recently reinforced after a roadshow around Australia and NZ with a client, Ramius Trading Systems (RTS), which is a CTA (Commodity Trading Advisor. Following on from the roadshow, I can say that there is quite a bit of investor interest in managed futures/macro. In fact, a number of superannuation funds and fund managers are looking for macro and/or managed futures managers.

To date, I have seen a number of investors place funds in one-off allocations to either Winton (which comes up regularly) or Aspect. I personally think that one-off allocations to individual CTAs are not a smart investment decision. Macro and managed futures should be contained within their own concentrated portfolio. The interesting thing is that if you have been around managed futures for some years, you will appreciate that you can achieve considerable diversification across a number of strategies, styles, and geographic allocations. Individually, most tend to have high standard deviations, but if you put a diversified group of CTAs together, the portfolio standard deviation drops considerably. This is due to the diversification factors above.

In the RTS portfolio, the individual standard deviations range from 24 per cent to 8 per cent. The portfolio standard deviation runs at under 10 per cent. I have seen this quite regularly in managed futures fund-of-fund portfolios. With the liquidity and the low to negative correlation of managed futures, these portfolios can be a handy tool for pension fund allocators. Another interesting point is the change in the nature of the managed futures and macro sectors. I cut my teeth in the managed futures sector, going back some 20 years. In the early days, most CTAs were just trend-followers, with their systems being derivations on a moving average crossover. The industry has moved forward since those early days, and the methodologies have become very sophisticated. One of the big London-based CTAs has 70-odd PhDs on staff, writing algorithms on price factors and flow-on effects. It’s a very different industry to the ’80s and ’90s. As a result, institutional investors are now appreciating the benefits of the diversification offered by managed futures and macro managers.

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