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Consistent returns the goal of hedge funds, absolutely

AUSTRALIAN investors can expect to hear a lot more about absolute return funds in future.

Absolute return is the increasingly common, and more illuminating, name for hedge funds.

The aim of such funds is to produce consistent positive returns in both rising and falling markets.

This contrasts with the ‘relative’ return target of most managed funds – funds that aim to produce returns between 2 per cent and 3 per cent above moves in the S&P/ASX 200 Index.

The problem with the latter app-roach, often referred to as bench-mark hugging, is that all funds suffer if the market as a whole takes a dive.

That is exactly what has happened over the past couple of years, creating an ideal environment for absolute return funds to promote their alternative approach.

The number of absolute return managers in Australia has grown rapidly over the past three years, ac-cording to research group ASSIRT. It estimates that 40 new managers were launched between 1999 and 2001.

The industry’s growth has continued this year, with industry analyst Rainmaker estimating that $1.9 billion was placed in Australian hedge funds in the March quarter.

Australia’s most popular ‘absolute return’ manager, however, is Platinum Asset Management, which rejects the hedge fund label.

Platinum is a specialist manager of international shares and has strongly outperformed the rest of the market through a judicious mix of stock selection (ie buying stocks expected to rise in price) and short selling, which allows it to profit from falling stock prices.

Its International Fund returned 1.5 per cent in the year to Sept-ember, compared with a 26.6 per cent fall in the MSCI World Index. Over five years it has returned 18.5 per cent a year, compared with just 1.7 per cent a year for the MSCI index.

Wallace Funds Management is one of Australia’s newest absolute return managers. Set up earlier this year by three former UBS Warburg brokers, Wallace is seeking to raise up to $100 million through a new company, Wallace Absolute Return Ltd.

Wallace Absolute Return will be listed on the ASX, following the recent listing of three other absolute return funds.

The manager of all three, Absolute Capital, became the first to list this type of product in Australia.

Managers such as Wallace and Absolute Capital employ a wide range of trading strategies in pursuit of their stated goals.

Wallace’s investment objective is to produce a return equal to the cash rate (currently 4.75 per cent) plus 4.0 per cent to 9.0 per cent after tax

A second objective is to preserve the capital of the company.

It will invest mainly in the top 200 ASX stocks and its strategy is to identify mispriced stocks and take advantage of relative under-performance or over-performance.

For instance, it will sell relatively expensive shares and buy relatively inexpensive shares.

The assumption underpinning this strategy is that, if the market rises, the inexpensive shares should rise more than the inexpensive shares.

The net exposure to overall market movements will be small.

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