AIA Managed Investments SIG Bulletin, September 2008 Page 1 of 12

Issue 45: September 2008

MANAGED INVESTMENTS Table of Contents s 1. Introduction by Scott McKenzie, AIA Councillor Page 1 1. Introduction by Scott McKenzie, AIA Councillor Page 1 2. Alternative Investments by Scott McKenzie Page 2 2. Alternative Investments by Scott McKenzie Page 2 3. Why Invest In Alternative Investments by Robert Graham-Smith, 3. Why Invest In Alternative Investments by Robert Graham-Smith, Select Asset Management Page 3 Select Asset Management Page 3 4. Why Invest in Agriculture by David Bryant, Rural Funds Australia Page 6 4. Why Invest in Agriculture by David Bryant, Rural Funds Australia Page 6 5. Debate Over Alternatives Value is Over by Oscar Martinis, 5. Debate Over Alternatives Value is Over by Oscar Martinis, HFA Funds Management Page 10 HFA Funds Management Page 10

* * * * * * * * * * * * * * * * * * * *

INTRODUCTION INTRODUCTION

By Scott McKenzie The US stock-market has been almost flat for about five years now and investors are looking around for other investments. Property (residential and commercial) has been even worse (contributing big-time to the sub-prime crisis). As a result there is a big movement of assets into ‘alternatives’ – hedge funds, managed futures, private equity, commodities, infrastructure and agribusiness. The situation has been better in Australia, but a move towards alternatives is apparent here also.

This edition of the MI bulletin focuses on these alternatives:

• Robert Graham-Smith of Select Asset Management has written a piece on why we should consider alternative investments. This is taken largely from the Select website which has a much larger, more informative look at this topic. http://www.selectfunds.com.au/Invest/pdfs/Select_Alternatives_Guide.pdf

• David Bryant of Great Southern Funds Management has written about agriculture investments in Australia.

• Oscar Martinis of HFA Funds Management contributes an article on the HFA view of this investment category. HFA Asset Management has a range of hedge funds. As the funds were set up in 2001 there is a lot of data available on these funds at www.hfaam.com.au. HFA is an experienced Australian fund manager, well worth keeping under review.

As well I have put together examples of higher performing wholesale managed investments available in Australia, with websites for direct access. We appreciate the contributions made by Robert Graham-Smith, David Bryant and Oscar Martinis towards this edition of the MI bulletin, and hope you find something of interest. Scott McKenzie is a financial planner and Councillor of the AIA.

AIA Managed Investments SIG Bulletin, September 2008 Page 2 of 12

ALTERNATIVE INVESTMENTS

By Scott McKenzie For the purposes of this article I will use the Morningstar categories to examine the range of alternative investments available to investors in Australia. This will not include therefore, a wide range of investments in for example, managed futures, warrants or options, or many private equity funds. Nor will it include any ASX listed managed investments. These will be for another time.

Another constraint is that fund managers make some of their funds available only via platforms such as Navigator (Aviva), Asgard (St George), First Choice (CFS), One Answer (ING). Many AIA members find their fee of 1.5% FUM too much to bear.

So we are constrained to wholesale funds accessible to investors directly.

Morningstar category: Australian Resources Only one fund looked worth considering: GS JBWere Resources Fund, which with a $5,000 minimum returned 33.6% pa over the last 5 years.

More information: http://www.gsjbw.com/?p=ManagedFundsHome_P

Morningstar category: Global Long/Short Two funds looked worth considering:

Winton Global Alpha, which with a $50,000 minimum returned 23.6% over the last year. This is a new fund distributed by Macquarie Investment Management.

More information: http://advisers.macquarie.com.au/acrobat/mps_wgaf_pds.pdf?refer=mps_collection_new

K2 Select International Absolute Return Fund with a $20,000 minimum returned 17.4% pa over 3 years but has been disappointing in the last year.

More information: http://www.k2am.com.au/funds/investment_funds.htm

Morningstar category: Australian Long/Short Only one fund looked worth considering: K2 Australian Absolute Return Fund which with a $20,000 minimum returned 14.6% pa over the last 5 years.

More information: http://www.k2am.com.au/funds/investment_funds.htm

Morningstar category: Global Infrastructure Only one fund looked worth considering: Challenger Global Infrastructure Fund, which with a $10,000 minimum returned 7.13% over the last year.

More information: http://www.challenger.com.au/content/ChallengerGlobalInfrastructureFund.asp

Morningstar category: Global Hedge Two funds looked worth considering:

Select Listed Investments, which with a $50,000 minimum returned 12.9% pa over the last 3 years.

Select Alternatives Portfolio, which with a minimum of $25,000 returned 11.8% pa over the last 5 years.

More information: http://www.selectfunds.com.au/product_range.html

Morningstar category: Agriculture Three funds looked worth considering:

Great Southern Rural Opportunities Fund, which with a $10,000 minimum returned 8.9% pa over the last 5 years.

AIA Managed Investments SIG Bulletin, September 2008 Page 3 of 12

RFM Chicken Income Fund, which with a minimum of $10,000 returned 15.4% pa over the last 3 years.

RFM Riverbank Fund, which with a minimum of $10,000 returned 11.7% pa over the last 3 years.

All three funds are distributed by (and now owned by) Great Southern. More information: http://www.great-southern.com.au/Managed_Funds.aspx

Comment There are many more funds available in Australia in these categories. The rest were poor performers. It’s a bit of a worry if long/short funds can’t do better than long-only funds in the sort of market we’ve had these years. Disclosure: I have investments in The RFM Chicken Income Fund.

* * * * * * * * * *

WHY INVEST IN ALTERNATIVE INVESTMENTS

By Robert Graham-Smith If the past couple of years are any indication, 2007 and 2008 have provided a clear message to many investors that the easy times for investment markets are over. Expecting returns of 15-20% relying on traditional portfolios that typically combine a mix of shares, cash and property investments, while experiencing only minor and short lived market corrections are history.

Whilst all bear markets eventually end and indeed provide great opportunities to build portfolios for the long term, the severity of the current one is likely to change the makeup of portfolios that investors both need and want. Whilst a small minority of investors will be able to handle the increased market volatility we are witnessing – including large drawdowns of capital – many average investors will not be able to bear the extremely long time frames that a traditional investment approach requires. Indeed, those that have not allocated to alternative investments or who have made only a small allocation to date are the most vulnerable in the current market environment through their narrow diversification.

Many smart investors (including some of the worlds leading endowment, superannuation and pension funds) have been investing in alternative investments for over ten years in an effort to diversify away from the risks associated with more traditional markets (e.g. shares and property). They do this because of their desire to access lowly correlated assets that should lead to smoother and more consistent return patterns across the entire portfolio. This does not mean that they do not invest in traditional assets but they understand the significant benefits of having assets that do not move in line with each other and therefore include, in some cases substantial, allocations to alternative investments next to their traditional counterparts.

In many cases, these investors have managed to weather the current financial storm by producing flat or slightly negative returns versus double digit losses from those that have taken a traditional approach only. Given that backdrop, now is a great time to consider how your capital should be managed going forward.

What are alternative investments? Exactly what the universe of alternative investments comprises is subjective, and may also depend on geographic considerations. The way Select Asset Management illustrates the range of investments and sub-categories available in the alternative investment universe is displayed in Figure 1 on the following page.

The diagram also illustrates that even within each of the widely recognised alternative investment classes it is possible to gain even further diversification amongst sub-categories of alternative strategies and alternatives assets.

AIA Managed Investments SIG Bulletin, September 2008 Page 4 of 12

Figure 1 – The Alternative Investment Universe Source: Select Asset Management

Why an allocation to alternative investments? There are strong reasons to believe that alternative investments should have a more prominent role in most investors’ portfolios, particularly looking forward.

Protecting Capital from loss. One of the key advantages of alternative investments is their ability to protect capital from loss during difficult market conditions. Measuring the maximum drawdown is one way of comparing the risk of different investments. Although investors are generally very familiar with share market investments, investing in shares requires a high tolerance for risk. Figure 2 below, illustrates how global equities expressed in Australian dollar terms have experienced a near 50% maximum drawdown within the last few years, in comparison to a proxy portfolio of equally weighted alternative investments, which experienced a maximum drawdown of closer to 5% over the same period. This matters because when markets recover, the distance to travel to get back to square one is far larger than the loss incurred. For example, the Australian listed property market fell 40% from its peak on the 22nd of February 2007 to June 30 2008. Getting back to zero would require those investments to return close to 68%, which could take years.

Figure 2 – Preserving capital on the downside. Global equities versus a proxy portfolio of diversified alternative investments – February 1999 to March 2008

-60%

-50%

-40%

-30%

-20%

-10%

0%

Feb-99

Jun-9

9

Oct-99

Feb-00

Jun-0

0

Oct-00

Feb-01

Jun-0

1

Oct-01

Feb-02

Jun-0

2

Oct-02

Feb-03

Jun-0

3

Oct-03

Feb-04

Jun-0

4

Oct-04

Feb-05

Jun-0

5

Oct-05

Feb-06

Jun-0

6

Oct-06

Feb-07

Jun-0

7

Oct-07

Feb-08

Global Equities (unhedged) Proxy Alternative Investment Portfolio

Maximum drawdown: -5.9%

Maximum drawdown: -49.9%

Note: The maximum drawdown is a measure of risk that refers to the peak to trough decline during a specific period of an investment or fund. Source: Select Asset Management Limited, Bloomberg, February 1999 to March 2008. Global Equities (A$ unhedged) is measured by the MSCI World Index. The Portfolio of Alternatives Investments consists of equal weightings of the HFR Fund Weighted Composite Index 100% hedged to A$, Barclays CTA Index 100% hedged to A$, 50/50 blend of Cambridge and Listed Private Equity

Alternatives

Alternative Assets

Trading/Managed Futures Funds Private Equity Other Alternatives

Systematic trading

Discretionary trading

Alternative Strategies

InfrastructureCommoditiesHedge Funds

Developing

Mature

Greenfield

Start-up capital

Early expansion capital

Development capital

Seed capital

Energy sector

Soft commodities

Base metals

Event driven

Hedged equities

Global Macro

Relative value

Hybrid securities

Miscellaneous alternatives

Agribusiness

Precious Metals/Gold

Equities

Physical

Restructure capital

AIA Managed Investments SIG Bulletin, September 2008 Page 5 of 12

Index (both 100% hedged to A$), Dow Jones AIG Commodities Index (100% hedged to A$), 50/50 blend of FTSE Gold Mines Index and Gold Bullion (both 100% hedged to A$), and the UBS Australian Listed Infrastructure Index.

Attractive returns. While the range of returns from alternative investments varies, many are well placed to provide attractive returns in their own right. For example, well selected private equity investments should produce returns above those delivered from an investment in listed equities, and many alternative strategies have produced returns on par with or better than equities over the longer term. As the name suggests, alternative investments generally means there are less investors participating in those markets, creating the potential for greater inefficiencies that professional investors can take advantage of. This, together with the lower liquidity from some alternative investments, can be expected to contribute to a premium return over some mainstream assets over the long term.

Lower returns from mainstream term assets. There is a widespread view that mainstream assets may produce lower returns than recent history going forward – something that has been witnessed in 2007/2008 but which could continue for some time. Uncertainty surrounding interest rates (which are now negative in some cases in real terms), falling global growth, sub-prime issues, inflation and the high valuations of mainstream assets, could make it more difficult for high returns to be achieved in the medium to long term from those traditional markets. Alternative investments may be somewhat less constrained by these issues and many are able to produce attractive returns in a range of economic environments. Commodities, for example, have historically been a safe-haven in times of inflation.

Low correlation to mainstream assets. The expansion of alternative investment options provides the opportunity for true diversification and a path to investment returns and capital preservation that is less dependent on rising equity, property or bond markets i.e. the returns are lowly correlated. An optimal portfolio of investments on a return/risk basis should be well diversified, combining asset classes or investment areas that are lowly correlated to each other. Globalisation and the faster flow of funds and information around the world have increased the correlation between mainstream assets in different regions. Including alternative investments in a portfolio enables the investor to create a smoother and more consistent pattern of returns over time through true diversification, especially if equity and/or property markets suffer extended periods of flat or negative returns.

Access to investment talent. There has been a significant shift of investment management talent into the alternative investment industry. To access some of the most talented investment professionals, investors have no choice but to seek access to some components of the alternative investment universe.

Leading industry experts expect that the alternative investments area will continue to grow, which is evidenced by the continual rise in the allocation to these investments by leading endowment, superannuation and pension funds around the world, as investors seek greater diversification and a smoother and more consistent pattern of returns.

Summary Research into the optimal size of alternative investment allocations does vary, and in practice it will invariably differ for any investor based on a number of factors, including (but not limited to) liquidity, taxation and single manager diversification. Whilst there is no optimal solution, any allocation to alternative investments must be large enough to make a difference particularly in periods of difficulty for mainstream markets – Select Asset Management suggests an allocation in the range of 10% to 30% as a starting point for an investor, with its own diversified portfolios currently holding about 30%.

For those investors that want a professionally managed and highly rated diversified alternatives fund to complement their existing traditional assets, please contact Select Asset Management and ask for a PDS for the Select Alternatives Portfolio. Robert Graham-Smith is a Portfolio Manager with Select Asset Management Ltd, www.selectfunds.com.au, telephone 02 8252 2200.

AIA Managed Investments SIG Bulletin, September 2008 Page 6 of 12

INVESTMENT IN AGRICULTURE

By David Bryant Background Agricultural commodity prices bottomed in 2001, and have been rising strongly since 2006 on the back of population growth, rising demand for protein-rich foods in developing nations, and the expansion of the biofuel industry. Historical trends suggest that we may be entering an inflationary wave, accompanied by high commodity prices and increasing agricultural profit margins and land values. As such, agricultural investments may be increasingly attractive. Any volatility in agricultural returns can be lessened by seeking out capable investment managers, who have the skills required to diversify the investments without sacrificing returns.

Historical Price Trends: Inflationary Waves and Price Growth Figure 1 indicates that a strong correlation exists between inflation and the growth rate in commodity prices. This is unsurprising, given the impact of rising commodity prices on the cost of goods purchased by consumers. During the last century we have experienced three waves of high inflation, peaking in 1920,1956 and 1980 respectively, each of which was preceded by a period of rising commodity prices. While commodity prices have been rising since 2001, significant inflationary pressure has only appeared in the last year.

While inflation in developed countries remains low compared to past cycles, it has bottomed and is on the rise. However in developing countries, inflation rates are significantly higher, with 30% inflation in Ukraine, Venezuela 29%, Vietnam 25%, Russia 14%1and China 9%.2 Global weighted inflation is now at 5%,3 and given commodity price movements, it is apparent the globe is ascending a fourth wave of consumer and commodity price inflation.

The prices of individual agricultural goods have historically moved in unison with the general commodities index, as shown in Figure 2. Although individual goods may lag or overshoot movements in the general index, all of these commodities have increased in line with the broader index during previous cycles.

1 GloomBoomDoom.com, 2008 2 BBC, 2008 3 GloomBoomDoom.com, 2008

Figure 1: High inflation and strong commodity pricegrowth are cyclical and move together.Sources: BarryBannister, Stifel Nicolaus, ABS, Brown, HP (1964)‘Three Aspects of the Australian Retail Price Indexes’ Economic Record,KR-CRB Commodity Indices

Inflation (Australia) v Commodity Prices1900 to 2007, Rolling 10 Year Averages

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Inflation (Aus) All Commodities

1

2

3

4?

AIA Managed Investments SIG Bulletin, September 2008 Page 7 of 12

Commodity prices are cyclical and move in unisonCommodities by category: 1900 to 2007, 10 year moving average of percentage price change.

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Pulp and paper Fruits, Vegetables and Nuts Grains Cattle All Commodities Raw Cotton Figure 2: Individual Agricultural commodity prices follow the broader index, suggesting that WRIF’s investment targets should benefit from strong commodity price growth over the medium term. Source: Commodity Data to 1957:BLS, afterward KR-CRB Futures Barry Bannister, Stifel, Nicolaus & Co. Given that Australia may be about to experience the next long-term inflation cycle, investors should consider the implications for investment portfolios. Figure 3 shows good periods to start a share portfolio, where the average real ASX growth is greater than 6%p.a. over the subsequent decade. This captures periods where a share investment, held for ten years, produces sizeable returns over the rate of inflation. These periods, shaded blue on Figure 5, tend to correspond to periods of falling commodity price growth and inflation. Conversely, Figure 4 shows poor periods to establish a share portfolio, where the average real return is less that 0.1%p.a over the next decade. These periods, shaded red on Figure 5, correspond to the first half of each inflationary wave. A potential fourth cycle is shown on Figure 5, suggesting that we may be entering another period of poor share market returns.

ASX (Daily): Good Investment PeriodsAverage real ASX growth over subsequent 10 year investment period

1

10

100

1000

10000

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

1916-1932Duration: 17yrs

Nom Growth: 6.3%p.a.Inflation: -0.4%p.a.

ASX Real Growth: 6.7% p.a.Commodity Price Growth: -

1.2%p.a.1975-1998

Duration: 23yrsNom Growth: 11.7%p.a.

Inflation: 5.2%p.a.ASX Real Growth: 6.5% p.a.

Commodity Price Growth: 0.8%p.a.

1953-1963Duration: 11yrs

Nom Growth: 8.5%p.a.Inflation: 2.5%p.a.

ASX Real Growth 6.0% p.a.Commodity Price Growth:

0.2%p.a.

Figure 3: Good periods for share investment. Ineach of the three periods,real ASX Growth isgreater than 6%, while commodity price growthis less than 1%. Sources:Barry Bannister, StifelNicolaus, ABS, Brown, HP (1964) ‘ThreeAspects of the Australian Retail Price Indexes’Economic Record, KR-CRB Commodity Indices

AIA Managed Investments SIG Bulletin, September 2008 Page 8 of 12

These three charts provide insight into the inter-relationship between commodity prices, inflation, and the real rate of return on investments. High inflation, which corresponds to strong commodity price growth, can decrease real rates of return as a result of simple arithmetic. Furthermore, rising costs can erode business profits, reducing returns on investments in those industries.

The agricultural sector however, is expected to experience widening profit margins as rising commodity prices increase revenue at a greater rate than input costs. This occurs because many substantial agricultural inputs, such as rainfall and solar radiation, are unaffected by the inflation cycle. Therefore, agricultural industries benefitting from increased prices and strong demand may outperform traditional asset classes and many businesses that are unable to pass on rising costs to consumers during the next inflationary cycle.

Capital Growth & Land Values During periods of strong commodity price growth, farm land values also increase. This capital growth can be very significant – for a period during the late 1970’s commodity boom, cattle, sheep and dairy businesses experienced capital growth of over 25% p.a.4 These periods are driven by increased affordability among farm owners, resulting from the widening profit margins discussed above.

4 ABARE, 2008

ASX (Daily) - Poor Investment PeriodsAverage real ASX growth over subsequent 10 year investment period

1

10

100

1000

10000

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

1933-1952Duration: 20yrs

Nom Growth: 4.9%p.a.Inflation: 5.3%p.a.

ASX Real Growth: -0.4% p.a.Commodity Price Growth:

4.3%p.a.

1964-1974Duration: 11yrs

Nom Growth: 6.4%p.a.Inflation: 9.0%p.a.

ASX Real Growth: -2.7% p.a.Commodity Price Growth:

8.8%p.a.1904-1915

Duration: 12yrsNom Growth: 4.3%p.a.

Inflation: 4.2%p.a.ASX Real Growth: 0.0% p.a.

Commodity Price Growth: 5.3%p.a.

2006-2016Duration: 11yrs?

Nom Growth: 5.2%p.a.?Inflation: 6.2%p.a.?

ASX Real Growth: -1.0% p.a.?Commodity Price Growth:

6.1%p.a.

?

Inflation (Australia) vs Commodity Prices1900 to 2007, 10 year Moving Average of CPI and Commodity Price Growth

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

CPI & RPI 10Yr MA Commodities

?

Figure 4: Poor periods for share investment. During these periods, growth in commodity prices has significantly exceeded real ASX growth. Figure 5:.Good and Poor share investment periods shown against Inflation and Commodity price growth. Sources: Barry Bannister, Stifel Nicolaus, ABS, Brown, HP (1964) ‘Three Aspects of the Australian Retail Price Indexes’ Economic Record, KR-CRB Commodity Indices

AIA Managed Investments SIG Bulletin, September 2008 Page 9 of 12

Management, Risk and Mitigation Because of the unique nature of agricultural enterprises, care must be taken to mitigate against factors that threaten investment performance. As such, selecting experienced and capable investment managers, who make all of the decisions about how to handle potential risks, is particularly important when investing in this sector. This is especially important when the comparatively illiquid nature of agribusiness investments is taken into account.

The most important risk mitigation procedure is diversification. Without diversifying agricultural assets, an investment is vulnerable to location-specific fluctuations in rainfall and climatic conditions, as well as movements in the specific market for that commodity. As such, it is preferable to diversify agricultural holdings across both geographic and climatic regions, as well as ensuring that an investment has access to a range of agricultural sectors and a mix of operational and property assets. This can have significant benefits in terms of reducing investment volatility.

A diversified agribusiness fund is not a new concept, but it does serve to reinforce the importance of investment managers to agricultural fund performance. In the administration of a diversified fund, a manager must develop competencies in a range of agricultural sectors and environments. This is the single greatest challenge of a diversified agricultural fund.

Conclusions Strong commodity price growth is expected to continue for some time, and is bringing about a wave of high inflation which will have implications for investment performance. Simple arithmetic, coupled with increasing costs that are often difficult to pass on to consumer, ensures that high inflation often results in poor real returns for traditional investments. Agricultural assets, on the other hand, will benefit from high prices, strong capital growth and increasing, rather than decreasing, profit margins. As such, it seems likely that an investment in agricultural commodities currently benefitting from the global boom will outperform many traditional investments for the duration of the current inflation wave.

When considering an agricultural investment, the ability of the manager to mitigate against a variety of risks is crucial to overall performance. Diversifying across geographic and climatic regions, sector and asset class will serve to reduce investment volatility, but requires a high level of managerial skill. David Bryant is the Fund Manager of Great Southern Fund Management’s Rural Opportunities Fund.

* * * * * * * * * *

AIA Managed Investments SIG Bulletin, September 2008 Page 10 of 12

DEBATE OVER ALTERNATIVES VALUE IS OVER

By Oscar Martinis With the global share market route still in full swing, the debate over whether alternative assets and in particular absolute return funds add value to investor’s portfolios should well and truly be over.

Absolute Return or Fund of Hedge Funds first appeared on the Australian retail investment landscape over eight years ago at the outset of the tech bubble and the bear market of 2001 to 2003. Since then investors have experienced a bull market without parallel and now a bear market so severe that many investors were not even born when we last saw markets capitulate so dramatically.

If we think about the events of the last 8 years we see the following; The Tech wreck, September 11, Global Credit Expansion, Equity and Property bull market, Iraq war, US & UK Housing collapse, Sub Prime and CDO implosion, credit contraction, surging oil prices, slowing global GDP growth (at best) or potential global recession (at worst) and now global and domestic equity bear market.

Through these market cycles the one constant has been the stable delivery of solid returns from the fund of hedge fund sector. Whilst the returns were not quite as spectacular as those achieved by the long only equity managed funds in the bull market, they are definitely not as spectacularly negative in the current bear market.

The objective of absolute return (or hedge fund) investing is to participate in the upside whilst keeping a close eye on capital and endeavouring to avoid the downside. Absolute return funds generate their returns primarily from the skill of the fund manager (alpha) and not from the ebbs and flows of markets (beta). Allocating a portion of your portfolio to Alpha generating investments is critical to building a well diversified portfolio.

Unfortunately for many investors it takes times of extreme market dislocations such as we are experiencing now to realize how highly correlated their traditional investments are. Beta returns are all well and good in a bull market as most financial assets are increasing in value but can be disastrous in a bear market as most financial assets fall in unison. Like the saying goes, “When the US sneeze’s the rest of the world catches a cold.”

In the case of HFA Asset Management’s funds, over the past 8 year period the slow and steady, alpha generating fund of hedge fund approach has delivered a long term result inline or slightly better than equity markets without the extreme volatility that investors experience with traditional investments particularly over the past 12 months. Over the short term the results are outstanding on a relative basis.

Investors who have been watching the sector waiting for proof of concept need wait no more. Fund of hedge funds have proved their capital preservation characteristics and low correlation promise emphatically since equity markets began their slide in October 2007.

As an example from 1 October 2007 to 30 June 2008 the ASX 200 has lost 18.22% of its value, the MSCI has lost 12.37% of its value and the S&P 500 has lost 14.85% of its value. In contrast the HFA Diversified Investment Fund a multi strategy, mufti manager offering has posted a positive 3.64% result net of fees, whilst the HFA International Share Fund, a mutli manager, single strategy equity fund has posted a small negative 0.19% result net of fees.

In my opinion, the diversification benefits to an investors overall portfolio are plain to see.

If we take a longer term view and consider the past 3 years to 30 June 2008, the results of absolute return investing speak for themselves. Over this period the ASX 200 Accumulation index returned 11.35%pa, the MSCI World ex AUS 9.13%pa, the S&P 500 4.41%pa and the DJ Euro Stoxx 50 returned 5.19%pa, whilst the HFA Diversified Investments fund returned 8.29%pa to investors and the HFA International Shares Fund returned 8.63%pa to investors for the three year period.

AIA Managed Investments SIG Bulletin, September 2008 Page 11 of 12

It is important to note that not all hedge funds are the same. In the case of HFA Asset Management we are a fund of hedge funds house whose funds aim to produce consistent risk adjusted returns. That is we aim to be a strong diversifier in investors portfolios by delivering steady consistent returns with low correlation to traditional investments. We also mitigate the single manager risk for investors as our funds are fund of hedge fund or multi manager funds. Other hedge funds may be single manager, single strategy offers which can have significantly higher volatility and significantly higher reliance on market beta. I urge all readers to carefully research any investment in hedge funds to ensure you fully understand the investment objective and process of your chosen manager.

In my mind the debate is over, absolute return funds (particularly fund of hedge funds) have over the past 8 years delivered Australian investors consistent returns, low volatility and true diversification through the fund of funds approach which not only mitigates market risk but also single manager risk.

A minimum 20% portfolio weighting to absolute return funds is what we at HFA believe is a meaningful allocation that will deliver the diversification benefits sought by investors. Research recently conducted by JP Morgan is seeing leading global institutional investors allocating up to 36% of their portfolio to alternatives in an effort to reduce their reliance in market returns (Beta). There is a global structural shift taking place away from traditional investment management to alternative asset investing where active asset management is truly practiced. Oscar Martinis is the Managing Director of HFA Asset Management.

* * * * * * * * * *

AIA Managed Investments SIG Bulletin, September 2008 Page 12 of 12

This bulletin is produced by the: Australian Investors' Association PO Box 2477 Fortitude Valley BC Qld 4006 Tel: 1300 555 061 Fax: 07 3257 3932 Email: aia@investors.asn.au Web: www.investors.asn.au

DISCLAIMER This Disclaimer is made for the purposes of the Corporations Act 2001 as amended by the Financial Services Reform Act 2001 ("the Acts"). The Australian Investors' Association The Australian Investors Association ABN 75 052 411 999 ("AIA") is a non-profit association that aims to assist investors become more knowledgeable and independent. In furthering its aims the AIA offers general information through its publications. The AIA has no Australian Financial Services Licence (“AFSL”) under Part 7 of the Corporations Act 2001 as amended. Does not contravene the Acts The AIA, its officers, agents, representatives, and employees do not hold an AFSL and does not purport to give advice or operate in any way in contravention of the Acts. The AIA, its officers, agents, representatives, and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this publication to the full extent permitted by lawThe AIA has a policy that does not permit the endorsement or recommendation of any product or service regulated by the Acts. Provides Information only This publication has been prepared as an information publication without consideration of any reader's specific investment objectives, personal financial situations or needs. Because of this, no reader should rely upon the information and/or recommendations contained in this publication. Readers should, before acting on any information contained herein, consider the appropriateness of the information, having regard to their objectives, financial situation and needs. The AIA believes that the material contained in this publication is based on the information from sources that are considered reliable and is accurate when issued. However, the AIA does not warrant its accuracy or reliability. All views and information expressed by the AIA, its officers, agents, representatives, and employees are for the purposes of discussion only. If this publication, or any information, relates to the acquisition, or possible acquisition, of a particular financial product, the reader should obtain a product disclosure statement relating to the product and consider that statement, and should consult a licenced person before making any decision about whether to acquire the product. The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the AIA. COPYRIGHT: All rights reserved. No re-publication or copying in any way, including electronic means, may be made without the prior written consent of the AIA.