Australian Hedge Funds Decline 0.7% in February

Date: Tuesday, March 10, 2009
Author: Malcolm Scott, Bloomberg

Australian hedge funds lost money in February, snapping two months of gains, as a stocks slide and ban on short selling financial shares weighed on equities funds.

The Australian Fund Monitors Index, which tracks the performance of 201 hedge funds managed from within the country, fell 0.7 percent last month, according to a report by Australian Fund Monitors based on 17 percent of the funds reporting. The funds rose 0.4 percent in January. The S&P/ASX 200 Index fell 5.5 percent in February, extending January’s 4.9 percent drop.

“Compared with the benchmark index, hedge funds outperformed by almost 5 percent,” said Chris Gosselin, chief executive officer of the Sydney-based industry researcher. “Hedge funds are finding ways of adapting to the new environment,” he said, referring to the government’s decision to extend a ban on the short selling of financial stocks.

The nation’s hedge funds dropped a record 18 percent in 2008, matching the global average, as the credit crunch forced investor withdrawals and prompted short-selling bans around the world. Hedge funds worldwide lost a record $384 billion last year, according to Singapore-based Eurekahedge Pte.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

The Australian Securities and Investments Commission on March 5 extended a ban on selling short financial stocks until May 31 as global banks and insurers tumble amid the credit crisis. The ban, which was due to expire March 6, was introduced in September as part of global efforts to curb volatility after the collapse of Lehman Brothers Holdings Inc.

Bank Pressure

Banks had pressured ASIC to renew the short-selling ban amid speculation foreign hedge funds were poised to drive down the share prices of the nation’s four biggest lenders, the Sydney Morning Herald reported March 3.

In a short sale, traders borrow shares from a broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference.

The MSCI World Index, which tracks shares in 23 developed nations, tumbled a record 42 percent last year and has lost 25 percent in 2009 as credit-related losses at financial firms neared $1.2 trillion. The index was little changed today.

Equity long-short funds, which short sell stocks and use derivatives to profit from share price declines, were the worst performing group in February, declining 2.2 percent. Equity Long funds, which buy and hold shares, lost 2 percent.

Multi-strategy funds were the best performers in February with a 4.1 percent advance, while Global Macro funds were second best with a 1.2 percent increase.

Gosselin said the “massive outflows” seen last year had stopped, while some money was flowing back to hedge funds.

To contact the reporter on this story: Malcolm Scott in Sydney at Mscott23@bloomberg.net