(Includes Australian market-neutral, long/short and income overlay (options) strategies).
Historically, Australian market-neutral funds have demonstrated strong risk-adjusted returns. In Zenith’s view, the outperformance potential from market-neutral investing is partly because short selling in Australian equities is underutilised relative to other regions where hedge fund activity is a larger part of the market. In Australia, short interest as a percentage of shares on issue is around half that of the US. Fewer hedge funds operating in Australia also creates an opportunity for short sellers as there are fewer participants scouring the market. While less competition is one thing, the ability to exploit this is another.
Long/short strategies have two primary variations:
- Active extension – can be used in place of a traditional long-only fund where the investor wishes to increase the “activeness” of their fund allocations in equities. That is, the fund can build a higher conviction portfolio by shorting stocks that it thinks will underperform and then use the proceeds to invest long in stocks that may outperform.
- Variable beta – can be used by investors to reduce the market risk of investing with a long-only fund that must be close to fully invested. Variable beta funds can decrease their market exposure to protect against market falls (by increasing shorts or cash holdings). In general, investing in quality variable beta funds should provide “smoother” returns than simply investing in the index.
Income overlay funds employ derivatives to enhance and/or protect income generation. Dividends from the underlying holdings are still captured as a source of income; however, the level of income generated may be augmented through derivatives. The degree to which each fund uses derivatives to enhance income generation varies between funds. The most commonly used is the buy/write option strategy. This involves holding a stock while simultaneously committing to sell the stock to a buyer at an agreed price in the future (through selling a call option), in return for option premium income.
Winner: Kardinia Capital (Bennelong Funds Management)
Zenith says: Kardinia Capital is backed by Bennelong Funds Management in a partnership structure. Zenith believes Kardinia’s portfolio managers, Mark Burgess and Kristiaan Rehder, make up a strong, collegiate team and offer one of the leading long/short capabilities within the sector, in addition to the fund having an impressive track record over the longer term. Kardinia employs one of the more dynamic variable beta strategies in the market, and has historically been active in lowering net market exposure where it has had a cautious view. Kardinia employs a wider net market exposure range in comparison to many of its peers, which has generally provided it with more scope to deliver alpha in falling markets. By way of example, Kardinia delivered strong results during the GFC.
Interview:
The Kardinia Absolute Return Fund is classified as a variable beta fund, which means it can vary its exposure to equity markets and cash.
The fund’s ability to tactically alter its market exposure through the cycle, with a focus on downside protection, has made it a fixture in the top quartile of performance league tables. For the year to September 30, 2013, it delivered 13.7 per cent.
Kardinia Capital portfolio manager Kristiaan Rehder says the fund’s prudent risk management framework includes two stop-loss orders and the flexibility to move 100 per cent to cash.
“While we look to achieve double digit returns, we’re also heavily focused on capital preservation,” he says.
“If we’re bullish we can take the fund’s net equity exposure to 75 per cent with 25 per cent in cash or term deposits. If we’re cautious we have the flexibility to hold 100 per cent in cash and take our net equity exposure down to zero, and if we’re outright bearish, we can take a short position of 25 per cent.”
Kardinia Capital and its principals Mark Burgess and Kristiaan Rehder spun out of Herschel Asset Management in 2011. The group has a partnership with Bennelong Funds Management, which owns 35 per cent of the business and provides distribution and back office support.
– Leng Yeow
Finalists:
– Perpetual Investments
• Perpetual boasts one of the best-resourced teams in the market and a process that has delivered consistent results.
•For the management of its long/short portfolios, Perpetual has employed a highly experienced pair of portfolio managers with considerable shorting experience.
• The funds have delivered excellent returns under the current portfolio managers.
– Zurich Financial Services Australia (Denning Pryce)
• Market-leading options team.
• Highly specialised and robust investment process.
• Consistent delivery of income objective.
