Saturday, 14 October 2006

My "alternative" investments

Aside from the main part of my investment portfolio being in stocks and property, I have a minor portion of my portfolio (around 5%) invested in some "alternative" assets:
Hedge Funds  - Ord Minnett OM-IP 220 series 1,
OM-IP 320,
OM-IP Strategic Ltd.
Agribusiness - Timbercorp Timberlots (1999),
Rewards Teak Project (2005),
Rewards Sandlewood Project (2005)
Other - Macquarie Film Investment Fund (FLIC)

While these are possibly good "diversification" assets, and, at least in the case of the agribusiness investements, assisted with tax planning, they have several substantial drawbacks:
* illiquid - the units in the hedge funds can be redeemed upon request, but it takes at least a month. The agribusiness units are "locked in" until maturity, unless you want to try to sell them privately (at a bargain price).
* difficult to value - the hedge funds publish a monthly "unit price". The others I just value at "cost" (except the FLIC which I wrote off ages ago) and hope for the best in the long term. There's really no way to guess what the prices for woodchips, teak and sandlewood will be in 5-10 years time (although the sales brochures have some really fancy looking graphs!)
* management fees - think of the worst possible combination of insurance "up front" sales commission, followed by the sort of on-going fees the hedge funds charge for "outperformance"! Boo, hiss.
* risk-adjusted return - the return (after fees) is probably insufficient for the amount of risk involved, although it's hard to evaluate with them being a part of a diversified portfolio. For example, my $5,000 FLIC investment provided an immediate tax deduction, but has since only returned around 15% of the amount invested and is being wound up with no residual value. At least I may be able to claim a capital loss on my tax return this year.

In terms of reporting, the hedge funds are held in one of my margin loan accounts, so I just include their value in my "equtities" total, along with a notional "value" ie. cost base) for my agribusiness investments.

So far, the Hedge funds have performed pretty well:

Fund Date Date Unit Price ROI
Issued Matures (Aug 06) pa
OM-IP 220 Aug '97 Jun '15 $3.9465 15.35%
OM-IP 320 Dec '98 Jun '07 $1.7648 7.43%
OM-IP S/L Aug '99 Jun '08 $2.1426 10.93%

and have a low co-variance with my share investments, thus reducing overall "risk" (volatility).

I bought them without any gearing (debt), and have since transferred them into one of my margin loan accounts to provide extra collateral. As I'm not using making use of the increased borrowing capacity, they act to greatly reduce the chance of getting a margin call.

I also have a tiny amount of other "alternative" asset classes like coins and gold bullion - but I don't bother trying to include these (or my cars/household items) in my net worth calculations as they're not really liquid.

No comments: