The Australian hedge fund industry returned an average -1.2 per cent in the six months to June 30, 2010. But this headline figure masks the broad diversity in returns achieved by various managers, which has caught the attention of the market regulator.

In this timeframe, returns by strategy ranged from 5.2 per cent for fixed income to -4.6 per cent for equity long/short. Returns from individual hedge funds exhibited an even wider range of results in the past six months: from 50.9 per cent to -34.6 per cent. Annualised compound returns since inception for individual hedge funds also exhibited a wide array of returns. The performances of the top 10 hedge funds produced ranged from 46.6 per cent to 20.8 per cent since inception. Most of these funds were launched between 2003 and 2007. Returns from the bottom 10 hedge funds ranged from -14.41 per cent to -3.1 per cent.

However, most were launched after 2006-07 so their returns would have been severely impacted by the financial crisis. Many of the offshore and domestic funds generating this wide range of returns are marketed to Australian institutional and retail investors. This has attracted interest from the Australian Securities and Investments Commission (ASIC). I’ve maintained a regular dialogue with ASIC. Every so often, I run a Hedge Fund 101 with their Australia-wide staff. Early in 2009, a member of their investigative team asked me about the likelihood of a Madoff-style episode in Australia, and more recently, they enquired about our hedge fund data. As I delved deeper, it became obvious that ASIC was concerned about the number of managers marketing into Australia that do not show up on their radar or have opaque businesses.

Very few offshore managers have Australian financial services licences but have applied for exemptions that are provided by ASIC if these managers are already regulated by the Securities and Exchange Commission or the Commodities Futures Trading Commission (CFTC) in the US, or the UK’s Financial Services Authority. But these offshore jurisdictions don’t regulate hedge funds to the same stringent standards as Australia. Here is a case in point: because the commodity trading advisor (CTA) standard provided by the CFTC is more lenient than the corresponding regulation in Australia, CTA managers registered in the US can access than Australia without clearing the regulatory hurdles put before domestic managers. I think this is unfair for Australian CTAs. It’s clear that Australian hedge funds and global managers seeking to do business in Australia face greater scrutiny from ASIC. And as regulators around the world also tighten their grip on hedge funds, hopefully the local industry will be recognised internationally as having already arrived at best practice standards of regulation.

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