Aurora Fortitude And The Ups And Downs Of Australian Hedge Funds

I talk a lot about the local hedge fund industry being somewhat forgotten. When Fund of Funds pumped money into the best hedge funds in the world, they extended their process by allocating for geographic diversification. As a result, Australian managers did well. I took a number of Aussie managers around the world and I was lucky enough to receive allocations from investors in Europe, US and Asia. Most were Fund of Funds and Family Offices.

Over the next few months I want to interview some of the managers that have been around the Australian and New Zealand industry. I want to give insight to my readers as to the challenges faced by managers setting up in Australia and New Zealand. And reminisce about the ups and downs. Some of the managers have been around since the 1990’s. Some have prospered; some have closed. This month I caught up with a fellow veteran, John Corr. Both of us have been involved in the industry since investors noticed it. This was primarily in the early 2000’s.

John Corr is the founder and principal of Aurora Fortitude Absolute Return Fund. It’s basically an Aussie equity Multi Strategy Fund, which is run at a very low volatility in comparison to the equity market. He’s also an avid South Sydney supporter, but I don’t hold this against him. He nearly didn’t agree to this interview as my team, Manly, beat his team in last year’s playoffs!

John spent most of his career at Citi running the Equity Proprietary Desk, which he tells me was profitable every year. Similar trading practices are employed in the Fortitude Fund. In John’s fund he participates in Mergers and Acquisitions, Yield, Convergence trades, Long Short, and Options trading.

John and I have seen and participated in the roller coaster ride of the Australian Hedge Fund Industry. John started his fund in 2004. He started with $2 million and went to $200 million of AUM prior to the GFC. Around this time, Fund of Funds and Institutional Investors were 75% of his AUM. With the liquidity down draft in 08-09, FoF liquidated en masse with Aussie managers being hard hit. John’s assets declined to $60 million. I found this heart breaking, and I wasn’t even part of John’s business.

Watching from the sidelines, this redemption pattern was being repeated across the industry. Excellent managers were seeing assets fly out the door. During this period, John put in positive annual performance with 08-09 up 12% and 09-10 up 2.80%. There were some monthly draws but compared to long only equities, they were minuscule. No draws in 08-09. In 09-10, four months down with the worst being 0.73%. Considering what the markets were doing, this sort of equity protection is outstanding. John does 8.1% compound per annum on a Standard Deviation of 2.8%. His Sharpe is 1.2%. You can only compare these numbers against the underlying pool that he fishes in. The wider ASX over the same period did 7.7% on a Standard Deviation of 14.4%. CFS Indexed Bond Fund did slightly over 6% on virtually the same Standard Deviation. John’s Risk numbers are outstanding considering the asset class. 

Continuing the roller coaster story, Fortitude’s assets rallied back to $120 million and then back down to $80 million. In recent years, John has focused on retail distribution with only one Institutional Investor. John’s assets are now at $160 million and growing nicely. The fund offers daily liquidity.

It’s funny, the industry, particularly offshore seems to be picking up. The allocators are just finding their way back to Australia. Although John and I have been around for a long time, we don’t seem to know any of the allocators. Some old brands but the people have changed. The old teams have moved on and we have the younger generation now kicking the tires. Allocations are hopefully starting to pick up but it’s early days.

I would love to see some of the large Superannuation Funds invest in Fortitude. John’s capacity is $1 billion, which makes him appealing to a large pool of capital. Ten years ago I watched Superfunds invest in FoFs bypassing the local talent. Yes, I know there are some very good local supporters, but you can count them on one hand. I would hate to see hedge funds go into a cyclical pickup where Aussie managers get allocations from offshore, fill up capacity and close before Superfund commence Due Diligence. Time will tell. I think there is still quite a bit to go prior to this scenario unfolding.