ASIC cool on hedge fund risk

Australians investors can breathe a sigh of relief. Hedge funds are not going to take down the Australian financial system.

The Australian Securities and Investments Commission has concluded the local hedge fund industry is too small to matter. Single-strategy hedge funds and funds of hedge funds manage just 2.4 per cent and 0.7 per cent respectively of all managed funds in Australia.

ASIC says single-strategy hedge funds manage $50.7 billion and fund of hedge funds $15.2 billion as of September 30, 2012. That pales in comparison with Australia’s total funds under management of $2.13 trillion.

ASIC's report, passed around at the Australian Hedge Fund Forum in Sydney on Tuesday, may have hurt the feelings of the many hedge fund executives who have failed to convince many superannuation funds to devote more of their money to such investments.

Hedge fund returns have not been impressive. Average and median annual returns since 2006 have broadly correlated with the total returns of the S&P/ASX 200 Index over the same period.

That’s because hedge funds, which have criticised what they see as Australian superannuation funds’ obsession with local equities, like stocks themselves. Their exposure to listed equities was US$19 billion with almost a third of the shares being Australian stocks, according to ASIC, whose survey covered 16 hedge fund managers and 12 single-strategy funds.

ASIC estimates that its survey represents 42 per cent of the Australian hedge fund sector’s assets under management as of September last year. Since 2006, hedge funds’ average annual returns have been negative twice, in 2008 and 2011.

Equity derivatives and Group of 10 sovereign bonds are the next two most significant asset classes liked by hedge funds, with positions of US$8.2 billion and US$6.9 billion respectively.

Hedge funds in the ASIC survey have used little leverage. The leverage they have used is largely confined to over the counter and exchange-traded derivatives. In 2012 such borrowing accounted for almost US$10 billion.

Average leverage, as measured by gross exposure as a multiple to net asset value, increased to 1.51 last year from 1.25 in 2010.

On average, hedge funds surveyed by ASIC could liquidate 92 per cent of their portfolio in less than 30 days.

“If the Australian financial market was subject to significant stress, the sector may struggle to meet redemption requests,” says ASIC.