Absolute Return Funds (ARFs) returned on average 3.2% for the month of November and have returned an impressive 9.5% year to date. Eurekahedge has over 150 funds listed in its Absolute Return Fund Database, where funds are categorised into Bottom Up, Top Down, Dual Approach and Diversified Debt. Among these strategies, Dual Approach funds, which combine a value, fundamental-driven stock picking approach with more top-down macro exposure than Bottom-Up funds, achieved the best returns - 5.03% - in November. Most of these gains came from emerging markets in India, the Baltic States and the Asia Pacific.

The year's most generous returns came from the Baltic States. Based on our database, ARFs invested in the Baltic region gained 6.77% in November. The CEE3 countries such as Poland, the Czech Republic and Hungary have gained well over 50% this year, while the entire Baltic region was up 28.36% for the year (and 74.7% in 2003). These returns are due largely to companies in the region that continue to expand through acquisitions and yet retain growing profit margins. Baltic countries are working hard to push down budget deficits below 3% in line with Eurozone requirements, and will likely benefit from continued economic integration with Western Europe.

While European countries farther east were hurt by unrest in nearby Ukraine and former Soviet satellite states in November, the region's success is on par with the Baltic States - ARF returns have been upward of 28% for the year there as well. Our database shows that Russian-allocated funds have returned 24.48% over the last three months and have been an emerging market hotspot all year, but saw an abrupt turnaround in November with the recent political turmoil in the Ukraine and the impending collapse of Russian oil giant Yukos. The Russian mandate lost 5.91% for the month.

Asia Pacific-focused funds, both Top-Down and Bottom-Up strategies, benefited across the board from the declining dollar and the continued strength in equities in all countries - Indonesia, Hong Kong and Korea were particularly buoyant in November. Overall, the ARFs allocated to the Asia Pacific ex-Japan region gained 7.88% in November. Japan, Taiwan and Korea, however, owe their returns mostly to differentials between their local currencies and the sinking dollar. Funds invested in this region continued to gain from increased liquidity in their markets as funds flowed away from the US dollar. Clearly, China is the engine behind Asian growth, although the slowed economy and likely revaluation of the yuan given dollar weakness is putting pressure on local manufacturers.

The parallel growth stories and increasing wealth gaps in both China and India provide interesting comparisons for emerging market managers. India's firm educational system and English proficiency provide a distinct contrast to China, which boasts better manufacturing infrastructure and production efficiency but whose economic, political, and educational frameworks are much less stable. Going forward, China's concerns over its long anticipated hard landing seem to have abated a bit, while the country's rampant GDP growth translates into perennial profitability for managers - absolute return funds allocated to the greater China region returned 5.65% for the month of November. Provided that the recent incident concerning Singapore-listed China Aviation Oil's disguised losses on oil speculation does not foment a string of debilitating scandals and confirm investors' fears of China's opaque corporate balance sheets, the country should continue to drive export-led economies in the region and attract investment from abroad. This growth will continue to propel Asia-Pacific indices, which have a difficult journey ahead in 2005 to sustain the impressive record established this year.

¹As at 9/12/04

²As at 30/11/04

³The use of both Bottom-Up and Top-Down while undertaking securities selection and asset allocation. Normally emphasis is on Bottom-Up. This style can be thought of as an obvious stock-picking approach with a macro overlay.

⁴Managers base their holding decisions largely on country, region and sector selection, credit creation and other major macro considerations. Portfolios typically consist of a blend of debt and equity. Rigorous tests of businesses are also conducted, in similar fashion to Bottom-Up, although growth is the Manager's priority.

⁵A value-based investment approach. Managers focused on stocks are "true" stock pickers owing to their in-depth use of fundamental analysis of individual securities. Effort is made to find mis-pricing opportunities (undervalued assets) and growth companies via company visits and scrutiny of accounting practices.

⁶The Manager attempts to capitalise on expectations of credit improvement in a mix or some of distressed, high-yield, sovereign, corporate and bank debt. Profitability depends on tightening of credit spreads. Convertible bonds (equity) can also be held.