Climate right for alternatives

 Alternative investments tend to be lowly correlated with traditional asset classes such as stocks, bonds and cash - and as such, investors can use them to diversify their portfolios, according to Lonsec's 2011 Alternatives Sector Review.

In addition, the current low growth and rising interest environment is making traditional asset classes look less attractive, said Lonsec.

According to data provider BarclayHedge, 2010-11 saw hedge fund assets under management return to pre-global financial crisis levels, with total hedge fund assets estimated to be US$1.77 trillion at 31 March 2011.

"Lonsec expects conditions for hedge fund investing to be favourable over the next 12-18 months … hedge funds in general should do well in an environment where the requisite skill is to pick between the winners and losers, whether that be securities or asset classes," Lonsec said.

Drilling down to the subsections within hedge funds, managed futures and global macro managers had a relatively softer year. Lonsec put the underperformance down to the fact these strategies perform better when the market is clearly trending in one direction, which has not been the case in the past year.

Of the 25 funds reviewed by Lonsec, the best performing fund over the year to June was Barclays CORALS Commodities Fund, returning 27 per cent over the year. The fund benefited from rising commodities prices and a rapidly appreciating Australian dollar, said Lonsec.

But because a large amount of risk is often assumed to achieve such high returns, Lonsec also applied the Sharpe Ratio (a risk-adjusted performance measurement) to the funds under review. Under this criteria, the AQR Delta fund provided the best return over the past year - with the HFA Diversified Fund and the BlackRock Global Allocation Fund close behind.

BlackRock also oversaw the worst performing fund, with the BlackRock Asset Allocation Alpha Fund posting an absolute return of -10.3 per cent over the past year (the fund was also the worst performer after risk adjustment). Lonsec said part of the reason for the poor performance was down to stop loss positions being triggered in a volatile trading environment.

The Ashton Paulson Advantage Plus Fund suffered the largest drawdown, at -16.7 per cent, largely due to concerns about its investment in the Sino-Forest Corporation, which is currently facing fraud allegations. Paulson liquidated its holding in Sino-Forest Corporation at a loss.