Thursday, 31 July 2008

Alternative Investment Performance Update: Macquarie Equinox

A couple of years ago I borrowed $50,000 to invest in an "alternative" investment - ie. not the usual cash, stocks, bonds or real estate. I invested in the Macquarie Equinox Select Opportunities Trust, a portfolio of absolute return managers (hedge funds) initially the following proportions:

Component Fund .................................. Initial Weight .... Fund Inception Date .. Compound Annual Return
------------------------------------------------- ------------------- ---------------------- ----------------------
Convivo Absolute Sovereign High Yield Fund ...... 10% ............... Jul 1999 ............. 18.08%p.a. (USD)
Ashmore Asian Recovery Fund ..................... 10% ............... Jun 1998 ............. 16.34%p.a. (USD)
Japan Macro Fund ................................ 10% ............... Mar 2000 ............. 19.62%p.a. (Yen)
SPARX Korea Long-Short Fund Limited ............. 10% ............... Dec 2003 ............. 32.25%p.a. (USD)
Campbell & Company - FME Large Program .......... 10% ............... Apr 1983 ............. 14.72%P.a. (USD)
Denali Offshore Parners - Global Macro Traing ... 10% ............... Jun 2000 ............. 26.43%p.a. (USD)
Aspect Diversified Programme .................... 10% ............... Dec 1998 ............. 11.46%p.a. (USD)
Irongate Global Strategy Fund ................... 30% ............... Jul 2004 ............. 15.24%p.a. (USD)

Weighted average "expected" return ......................................................... 18.46%p.a. (USD)
Actual Annual return to date ............................................................... 10.03%p.a. (AUD)

The usual provisos applied regarding "historic returns are not an indication of future performance", so when I decided to invest in this product I ignored the splendorous compound annual return figures and instead assumed that returns on this investment had a reasonable chance of achieving around 10%p.a. over the 7-year investment period - so far, despite the turmoil in the global stock markets the fund has yielded 10.03%p.a. I expect that the returns so far have also been negatively affected by the appreciation in the AUD over this period, so there is some prospect for a boost in returns in coming years if the Australian dollar has peaked against the USD and starts to drop back to it's long term average exchange rate (around 75c-80c).

I borrowing the entire amount from Macquarie Financing at a fixed rate of 7.75%pa until the maturity date (30 May 2014), at which time the loan can either be repaid with the proceeds of liquidating the investment, or paid out and the investment retained. Borrowing to invest in an income-producing asset such as this is quite tax effective. The annual interest payments are 100% tax deductible, so I get a tax refund of, say, 40% of the interest cost each year. When the investment is eventually sold, any capital gains will benefit from the long-term CGT concession, and so will be taxed at around 20%. The effect of this tax benefit can be seen in the "Loan" and "Net Tax Loan" lines:


The unrealised Net Profit from this investment (Investment Valuation - Total (after tax) cost of Loan) is currently around 9c per $1 invested - or a total of approximately $4,500.

This plot also shows how the Macquarie Equinox returns have low correlation with the Australian Stock market returns. It can also be seen that the Trust has had lower volatility than the stock market over this period. The Trust underperformed an investment in the stock market for the first year, but in the second year has continued to produce positive returns will the market has suffered considerably. I'm not betting on the Trust producing superior returns to the stock market or real estate over the long term, but by including it in my overall portfolio of investments it should help reduce risk (volatility) without adversely impacting on overall performance.

When the investment is due to mature in 2014 I'll need to investigate possible refinancing of the investment loan, as it may be tax-efficient to retain the investment until I am retired and (hopefully) living off my tax-exempt SMSF pension income. If the Seniors Tax Offset is still available by the time I reach 65, it may be possible to realise up to $50,000 of capital gains each year during retirement will a lower effective capital gains tax rate.

So far this investment strategy is working out quite nicely (better than my CFD Forex trading!), although there is always the risk that one (or more) of the component funds might implode (think Long Term Capital Management), which could easily wipe out the returns on this investment, and leave me out of pocket for the interest on the investment loan. In a worst case scenario, the Macquarie Equinox Trust itself could become worthless, leaving me with a $50,000 debt. While it is alluring to make a profit from "other people's money", it's never a free ride. It reminds me of the Lloyds Insurance "Names" who for many years received income without having to tie up any of their investible net worth. However, when things went pear-shaped they had massive personal liabilities, which drove many of them bankrupt.

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2 comments:

Monica Martignoni said...

Hi!! I came across your post on Macquarie equinox select trust via google. I am trying to ascertain what will happen come June 2014 with regards to the 'capital protected' amount. Would you kindly be able to give out any info? Very much appreciated !!

enoughwealth@yahoo.com said...

I don't have any specific info. Other hedge fund investments I've held to maturity have offered to either redeem the units on the maturation date (for the capital guaranteed amount), or 'roll over' the value at maturity into a new, similar product for another period. We'll have to wait and see what Macquarie sends out in May 2014 or thereabouts. Since I borrowed the $50,000 to invest from Macquarie finance, I'll probably not 'roll over' my investment, but instead just redeem it at maturity and take the net proceeds of ~$1,000 as cash. Due to the GFC this investment proved to be a 'dog'.