Zenith's 2013 Equity Market Neutral Sector Review found that the sector still continues to outperform, but that activity among investors is still somewhat limited.
"Short selling Australian equities is relatively unutilised in Australia relative to other regions where hedge fund activity is a larger part of the market," Zenith head of alternatives Daniel Liptak said.
"Short interest as a percentage of shares of issue is around half that of in the United States. In our view, fewer hedge funds operating in Australia (as Australian equities specialists) creates an opportunity for short sellers here as there are fewer participants scouring the market."
Mr Liptak said while the domestic hedge fund industry is less developed than in the USA or Europe, there are still some good opportunities for investors, with Australian hedges listing among the world's best.
The sector review focused on products widely available to Australian investors, and from an initial 13 market neutral products, six funds were rated 'Highly Recommended' and one fund was rated 'Approved'.
The top ranking fund on the Zenith approved product list was the Bennelong Long Short Equity Fund.
The review also found that the risk/return profiles of Zenith's 2013 Equity Market Neutral APL index had strong relative returns and less volatility when compared with other asset classes.
Zenith has said that due to low levels of market correlation, market neutral investments are a good diversifier within a portfolio.
"Australian market neutral funds are among the world's best hedge funds and offer investors a compelling investment opportunity, which has often been ignored in favour of their offshore counterparts," the review said.
"In an environment where the catch cry is about going back to basics, market neutral strategies and their low levels of correlation to the broader equity index should hold significant investor appeal."
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