Performances of the various hedge fund strategies ranged from 9.05 per cent (YTD) for fixed income to 1.39 per cent (YTD) for fund of fund – low volatility. Standard deviation for all strategies fell to 11.53 per cent on average, compared to 11.85 per cent three months earlier. The top three performing funds (YTD) were 36 South Regent Fund SPC (96 per cent), 90 West Global Basic Materials Fund (54 per cent) and Naos Small Companies Fund (51 per cent). However, their annualised standard deviations were also high at 79 per cent, 23 per cent and 28 per cent respectively.
Of the top 10 best performing funds (YTD), half used investment universes that dealt with resources or Asia. This result ties in with my recent international roadshow where I found that more and more sophisticated investors (e.g European family offices) are looking at Australian managers to benefit from our country’s growing relationship with China, Asia in general, and India. These offshore investors are quite interested in placing money with our local hedge fund managers but the lack of clarity in tax, particularly withholding tax, is a stumbling point. Withholding tax is levied at 8 per cent on ‘revenue’ streams. The issue is whether a trading gain by a hedge fund manager is assessed as ‘revenue.’ To date, these gains have not been assessed as such, resulting in some uncertainty.
For example, one of the major accounting firms previously required that the potential withholding tax liability be included in the audit of a particular hedge fund. However, I understand that the accounting firm no longer requires this. A number of hedge managers who are keen on attracting international investors have had meetings with the Australian Tax Office and Treasury to seek clarity on this. The good news is that on December 17, the Board of Taxation released its discussion paper on the review of the taxation treatment of collective investment vehicles in Australia. The key objective of the review is to recommend changes that would remove tax impediments to international investment in Australia.
Submissions to this discussion paper are due by February 28 this year. For an Australian-based manager trying to win offshore investment, the most common structure currently being used is a Wholesale Unit Trust Feeder (or Retail) into a Cayman LLC as the hub. The Aussie manager should use as the base currency, US$, with Euro and A$ share classes. The hedging policy needs to be looked at closely as we see quick falls in the A$ from time to time and you need to be careful of a margin call on the hedge position. In addition, an Aussie manager could use a UCIT III structure. This is particularly of interest if you want to market into Europe or the Independent Financial Advisor route in Asia. UCIT IIIs are selling like hot cakes. We met a high-end distributor in Geneva recently on a roadshow and we were told that they are getting significant inquiry for Australian assets via UCIT structures. These developments suggest the road ahead, for local hedge and traditional fund managers trying to win offshore investors, is being upgraded … hopefully into a freeway for money inflows!