A traditional share investment, sometimes referred to as a ‘long only’ share investment, is where an investment manager creates a portfolio of shares he believes will outperform the market. The problem is, even though the investment manager may have an exceptional share selection method that consistently beats the market, if the overall market falls by 50%, then the portfolio may still fall by 40% or more, and a 40% loss of capital is always bad, no matter what the context.

A market neutral manager does not try to outperform the market. Instead, he tries to remove as much share market risk as possible. To achieve this, rather than just create one portfolio, a market neutral manager creates two portfolios – a long portfolio containing highly ranked shares (those shares the manager believes have the best prospects), which profits from rising prices, as well as a short portfolio of lowly ranked shares (those shares the manager believes have the worst prospects), which profits from falling prices. Each portfolio is of approximately equal dollar value. With a long and a short portfolio of equal dollar value, a profit will result, provided that the long portfolio rises more or falls less than the short portfolio, regardless of whether the market goes up, down, or completely sideways. Of course, if the short portfolio outperforms the long portfolio, a loss will occur. The key point is that the returns are largely independent of market direction, as the market neutral manager believes he has a much higher probability of selecting shares than predicting the direction of the overall share market, and by being market neutral, he can implement his share selection method without the constant worry of a share market correction or collapse.

Whilst the basic concept of market neutral is fairly easy to grasp, it takes a lot of skill to implement a market neutral strategy successfully. Consistently knowing which shares to go long and which to go short, and by the correct amounts, is the much more complex component of a good market neutral strategy.

Market neutral investing dates back to at least the inception of the hedge fund industry in the 1940s, and is one of the major hedge fund investment styles. Many superannuation funds invest in market neutral strategies, but due to a lack of public understanding regarding short selling strategies, and the fact that most substantial market neutral funds are overseas (i.e. principally the USA, Japan and Europe), the majority of high net worth investors in Australia have not taken advantage of market neutral opportunities. Most retail investors simply have no ability to access these strategies, unless they do so indirectly through their superannuation fund, due to the obstacles of high initial investment requirements, and the lack of substantial Australian market neutral offerings.

We use hundreds of carefully weighted factors to rank the shares from best to worst. Whilst we rank thousands of shares, we only place approximately 300 shares, i.e. the most highly ranked shares, in the long portfolio, and approximately 300 shares, i.e. the most lowly ranked shares, in the short portfolio. Share prices move up and down on a daily basis for a large number of diverse reasons, and it is impossible to point to any single ‘factor’ that drives share prices all of the time. The hundreds of factors we use are grounded in sound academic theory, and then tested over many years of data to ensure they have worked historically. They are then continually monitored as new data becomes available, to ensure they continue to perform as expected.

The information that we consider and integrate into our comprehensive investment approach includes; forecasts from the analysts of major investment banks and brokerage firms, data taken from the financial statements of individual companies, economic and industry data and forecasts, historical prices of the individual shares themselves, and related instruments. All of this information is integrated into a coherent and rigorous framework that we have thoroughly back-tested, and which underpins our decision making framework.

We utilise a share selection method which allows our decision making process to be completely mathematically defined, ensuring consistent implementation, and allowing for research to be thoroughly tested prior to deploying investment capital.

We have very carefully considered the markets to be included in the Fund, carefully weighing up the results of our extensive research, as well as the correlations with other markets. We will continue to add additional markets in the future, however, the key consideration must always be maximising risk-adjusted returns for clients, and we will therefore focus on markets that allow capital to be utilised in the most productive manner possible.
We understand, and it is why the average Australian investor has very limited (if any) exposure to international shares, even though the Australian share market comprises only around 2% of the total global market. That adds up to a lot of missed opportunities, and it is caused mostly from a lack of knowledge. A share is simply a piece of ownership of a company, irrespective of where it is listed, and in the current global market place, the location of a company’s listing is often not entirely governed by where its business operates. For example, BHP, Australia’s largest company, trades heavily on the London Stock Exchange. Many of our large companies supply their services globally, or outside of Australia to some extent. When attempting to select the best possible investments, it is logical that more opportunities can be located by considering 2,000 investments rather than 200? Why focus on the Australian market, when we have the ability to apply our strategy globally, and by doing so, improve the risk-adjusted return for our investors? The investment strategy is designed to be both country and currency neutral to avoid issues associated with big currency moves, or events which impact a particular country. We understand that some investors are nervous about international markets, but this nervousness is largely based on a lack of familiarity, and not on investment logic.
The Fund is approximately country and currency neutral, meaning that it carries negligible currency risk. Returns are in AUD, and currency risk is very close to fully hedged all of the time, because of the way that the market neutral portfolio is constructed, with approximately equal long and short positions in each country. This is explained in detail in the Information Memorandum, and an example is provided.
If there was another GFC, we expect the Fund would remain liquid, as it will trade liquid listed securities and will not have any positions in complex derivatives or illiquid markets/instruments.
 Like any investment, there are risks associated with investing in the Fund. By their very nature, the risks involved with investing in the Fund cannot be exhaustively categorised. There are a number of risk factors that could affect the performance of the Fund, the level of income distributions, and the repayment of your capital. Key risks include:

  • Manager risk. The success of the Fund is dependent on the ability of the Manager to identify investment opportunities that achieve the Fund’s investment objective. Like any fund, this is dependent on the quantitative analysis and research activities undertaken by the Investment Manager, and on historical relationships between securities acting in a manner which is consistent with the Investment Manager’s analysis, over time. If the Investment Manager does not exercise an adequate level of skill in interpreting the data, the investment process is flawed, or inaccurate, or any of the historical relationships on which the strategy is based break down, then this may cause losses to the Fund.
  • Leverage risk. The use of leverage may magnify the potential gains and losses achieved by the Fund. The amount of listed securities borrowed by the Fund, or the face value of derivative positions held by the Fund at any point in time may be substantial. If the Fund were forced to liquidate its portfolio by a lender or a counterparty at short notice, then this could result in the Fund being forced to sell assets quickly, which may mean that assets are sold at prices below those which could be achieved in an orderly sale, resulting in losses to Investors.

This is not a comprehensive summary of all the risks of investing in the Fund. We recommend you review all the risks discussed in the Information Memorandum, in consultation with your professional adviser, before making a decision to invest in the Fund.

There will be no margin calls to clients under any circumstances. Investing in the fund is no different to investing in a share. Your liability is limited to the amount of the investment.
If this was a temporary event (e.g. extreme illness) the Fund would be able to operate without incident or interruption, however, in the worst-case scenario, i.e. death, the Fund would be wound down in an orderly fashion and funds returned to investors by the Fund Administrator and Custodians. It is the nature of sophisticated investment management that there is an unavoidable amount of dependence on key personnel, and this is true of even very large global asset managers, as individual funds are typically still managed by either a very small group of individuals, or a single individual, who is often very difficult to replace, due to their intimate knowledge of the investment strategy. It is worth bearing in mind that the Rushton group of companies is a family firm, owned and run by its proprietors. As many investment managers abandon a successful fund (and the investors in it) to establish their own firm, it is important to know that this concern has been removed.
They have over 130 years’ experience in providing trustee services and are part of the IOOF group (one of Australia’s largest listed financial firms). For further information, please visit their website at: http://www.aetlimited.com.au.
No, the units in the Fund effectively act like shares, in the sense that they have an ‘ex-dividend date’ for distributions. If you sell a share before this date, you don’t get the dividend, however, you also don’t experience the drop in share price that occurs on the ex-dividend date to compensate for the fact that you just received a cash distribution and the value of the share fell accordingly. In other words, the value of the dividend is embedded in the value of the share, and it is the same with distributions and units, so no one is ever penalised based on when they buy and sell. This is because a unit price is just the Net Asset Value of the Fund divided by the number of units on issue, so when a distribution is paid, the NAV per unit drops as well, which makes everything equal.
The Fund uses the series accounting method, which allows for multiple series of units to be issued in a fund at different points in time, whilst ensuring fairness to all investors regarding the calculation of performance fees. Without series accounting, it is possible that investors who subscribe for units at different times may be at a disadvantage regarding the payment of performance fees. With series accounting, investors receive a new series of units each time they make an application for units in the Fund. Each series of units has identical rights in all respects (including but not limited to voting rights and rights to distributions of capital and income) other than in relation to the calculation of performance fees.

Series Consolidation: At the end of any month, if the Main Series pays a performance fee, any other series that also pays a performance fee in the same month is then rolled into the Main Series in the following month. After consolidation, the high water mark for all units in the new consolidated Main Series will be the highest Net Asset Value (NAV) per unit of the Main Series, after payment of the performance fee. When consolidated, other series of units will be replaced with Main Series units, however, investors are not disadvantaged, as although they may receive less units, the NAV remains the same.

The Electronic Transactions Act 1999 allows for documents to be legally signed using an electronic process, which we comply with. Further, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) makes allowance for electronic identity verification of both individuals and entities. Our online application system has been designed to comply with current legislation, and it saves our investors considerable time. We strive for greater efficiency wherever possible.