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.

Subscribe to Enough Wealth. Copyright 2006-2008

Forexplosion

More of an implosion, actually. After slowly trading my CFD account back up to $3,300 during this year (with some hope of recovering my initial $5,000 stake by year's end), I had a big loss a week ago when the Aussie suddenly dipped against the greenback. I managed to pick the wrong directional moves several times in a row, ending up with less than $2,000 in my account by the start of last week. Foolishly I then increased my contract size from $25K to $150K in an attempt to recover my losses if the Aussie resumed it's trend towards parity with the USD. For a while this high risk approach appeared to have paid off, with the AUD reaching close to 98c just prior to the release of the latest inflation numbers last week. My account balance had recovered to just under $3,000 and I started thinking about reducing my position from $150K to my usual position size of $25K or $50K. Unfortunately I decided to "hang in there" for just a little bit longer...

Of course the Aussie dollar then plummeted overnight, and continued dropping even when the inflation numbers came out slightly higher than expected (which theoretically should have increased the chance on another interest rate rise by the RBA, and hence boosted the AUD vs USD). Having rapidly lost $1,000 I decided to keep the position open in the hope that there would be a rapid rebound. But eventually I gave up and closed out the position when my account balance was down to only $700. I then bought the AUD again when it had dropped another half a cent and seemed to have bottomed out. This turned out to be a false bottom and the Aussie broke through the bottom of the long term up trend and my position got closed out with a residual $190 in the account, which I'll have to cash out. It's nice to imagine that if I just added a little bit more to my account and resumed trading I could eventually recoup my losses - but that's the siren song that lures gambling addicts to their doom. I'd rather just cut my losses and run.

Subscribe to Enough Wealth. Copyright 2006-2008

Salary review time

Last week the annual salary reviews were distributed at my workplace - since I'm already at the top of the salary range for my position I just received the standard across-the-board "inflation" adjustment, which was 4% this year. The chart below shows how well the "inflation" rises have tracked the headline CPI rate over the past few years - the figures for 99/00, 01/02 and 03/4 can be ignored as I changed roles and received pay increments in those years. Overall, it appears that my company has been pretty good at increasing salary in line with inflation. Of course, the AWE (average weekly earnings) rate tends to increase by more than inflation, so the company policy of making the basic pay rise track the inflation rate isn't particularly generous. However, although I want my salary to keep pace with our living expenses and provide enough income to fund my savings plan, the annual "pay rise" is rather insignificant compared to other influences on our wealth and standard of living. Compared to the effect of RBA rate rises on the monthly payments for our home loan and margin loans, and the impact of real estate and stock market valuations on my net worth, it matters very little whether my pay rise is 2%, 4% or even 10%!

Subscribe to Enough Wealth. Copyright 2006-2008

Makes you wonder about all the mistakes they don't fix up

DS2 has a retirement (superannuation) account with ING that I opened on his behalf in November 2006. There haven't been any transactions on the account since the initial $1,200 deposit, and the value of the account had only increased slightly to $1,289.48 by 30 June 2008. It was therefore a bit of a surprise to get a letter from ING yesterday stating that a recent "review [of] our processes, controls and systems" had "identified an additional value" of $26.80 that will now be credited to the account as an adjustment. While I'm glad that they've apparently found a mistake and are rectifying it, it's a bit of a shock that the required "adjustment" is over 2% of the account balance! It makes you wonder how many mistakes by professional investment managers go undetected.

Subscribe to Enough Wealth. Copyright 2006-2008