Hedge Fund Report: March 2011

The HFRX index fell 0.88% for March whereas the MSCI World Index rose by 0.72%. Equity market neutral, macro, event driven, and special situations saw gains. Equity market neutral saw the best gains, but equity hedge the second worst losses!



HFRX is a daily priced index in contrast to HFRI which only provides monthly results but covers a much wider selection of funds as a result. Dow Jones Indexes and Credit Suisse are launching of the Dow Jones Credit Suisse Core Hedge Fund Index, which will also be a daily priced index. The existing Dow Jones/Credit Suisse index is a monthly index. The index includes 40 component funds diversified across seven style-based sectors: event driven, long/short equity, global macro, emerging markets, managed futures, fixed-income arbitrage and convertible arbitrage. It is an asset-weighted hedge fund index, whereas the HFR indices are not I believe.

Early results for HFRI show a loss of 0.17% for the month:



By contrast to HFRX, HFRI shows losses for macro strategies and gains for equity hedge. Generally, I'd expect HFRI to be more representative of the broader reality for these individual strategies due to the larger number of funds included.

The Really Long Term

I don't know if any other personal finance bloggers have more than twenty years of data, but I haven't seen it posted. Now and then I like to update what the really long-term picture has looked like.



The graph has networth (blue) and the split into retirement accounts (green) and non-retirement (brown). The record starts when I first arrived in the US in 1990. The early years I was a grad student and then a post-doc and visiting assistant professor and in debt. Then I got a better job as a researcher in the late 1990s and savings began to accumulate. Unemployment and a stock market crash lead to a decline in 2002. Then an even better job in the mid 2000's followed by our move to Australia, merger of finances with Snork Maiden and a worse financial crisis saw net worth plummeting from near $500k to less than $200k. Since then the market rebounded and I've had a couple of jobs where we have largely saved my salary and we are now at a new high in US Dollar terms. The path seems a little smoother when measured in Australian Dollars:



I don't know whether this stuff might be useful to people just starting out to give an idea of how things might look in your future. If you don't dramatically expand your standard of living, higher paying jobs in the future can have a big effect on savings (countering the idea of the importance of starting early). And there can be some big deviations along the path. This one charts spending versus total income including market returns:



The big bumps are usually associated with international moves. Now with two of us in expensive Australia, our spending has bumped up to a new plateau but this graph isn't adjusted at all for inflation so the escalation in living costs is not so great, really. This is very roughly the inflation adjusted numbers (2008 US Dollars):

Fund Distributions Begin to Return

Distributions from managed funds (Australian mutual funds) fell dramatically in the wake of the financial crisis. Some funds are now beginning to again pay significant distributions. More generally, dividends are rising.

For the January-March quarter, I got a $2035 distribution from the Colonial First State Developing Companies Fund, which is more than the sum of distributions received in 2008, 2009, and 2010. On the other hand, CFS Future Leaders paid out just $23 and CFS Diversified $71, and my other CFS funds seem to only be paying annual distributions. CAM.AX, CIF.AX, AOD.AX, and PMC.AX are all paying a reasonable level of regular dividends. IPE.AX hasn't paid a dividend since 2008 and EFG.AX since 2007 (no surprise there).

Snork Maiden got $236 from Celeste Small Companies and smaller amounts from property and fixed interest funds.

In the US TFS Market Neutral made its biggest distribution to date at the end of 2010 and there was a decent distribution from the China Fund. Other dividends are small or non-existent.

Receiving distributions is not necessarily a good thing as it means you have to pay tax (though it is the only way to get tax credits attached to company profits in Australia). But it is a sign that funds are doing well when they have to pay out money. I wonder how a strategy that sold funds that made big payouts and bought ones that didn't would do?

Moominvalley March 2011 Report

As usual everything is in USD. The AUD rose again to 103.6 US cents. This improved our returns in USD terms and reduced them in AUD terms. World stock markets rose a little in USD terms with the MSCI World Index gaining 0.72% for the month. Here is the summary account for March:



Non-investment income and retirement contributions were very high as this was a 3 pay month (we are paid every 2 weeks). Expenditure was $7,114 but a large part of that was the ticket to Cloud Cuckoo Land. Without that expense, core expenditure was a reasonable $4,061.

Investment return was $4,770 but taking out the effect of exchange rate movements was a loss of $2,722. The rate of return was 0.91% in USD terms, -0.52% in currency neutral terms, and -0.89% in AUD terms.

Net worth rose in USD terms by $16k (rose by $A7k in AUD terms) to $542k ($A524k) another all time high in USD terms.

Investment allocation saw a reduction in hedge funds and Australian stocks and a rise in other asset classes due to market movements, the return of capital from EAIT, and the investment in GTAA.

As a follow up to yesterday's post I've added our own rates of return to the table:



(well I dropped some of the timeframes as I couldn't be bothered to compute them). Moominmama's more conservative portfolio performed better over the 3 year period that included the global financial crisis but underperformed us across the other horizons. Over a 5 year horizon we have matched the MSCI World Index and over ten years beaten it. Over the ten year period our beta to the index has been 1.22 with an alpha of 2.11% p.a. Over 5 years, 1.22 with an alpha of 0.88% p.a. Over 3 years beta was 1.27 and alpha -2.29% and over 2 1.24 and 0.40%. So we have taken on more risk than the index but added more return than just the risk alone would provide except over the period around the global financial crisis.

The following graph shows the rolling estimates of alpha and beta using a 36 month window:



Alpha is much more volatile than beta. The high values of alpha achieved around the middle of the decade inspired over confidence and subsequent fall in alpha to negative values. Assuming no major setbacks in the next few months, I forecast the 36 month alpha will again rise to 6% by the end of this year.

Moominmama Portfolio Long-Run Performance

We now have enough data to compute the rate of return over 8 years on Moominmama's portfolio. This table compares it to the MSCI World Index:



All rates are annualised. In general the portfolio has about half the performance of the MSCI World Index. This isn't surprising given the conservative nature of the portfolio. I estimate beta at 0.47 and alpha at -2.31%. The latter is not very good. The standard deviation of monthly returns is 5.91% for the MSCI for the months for which we have data on the portfolio and 3.3% for the portfolio. So it seems there is a bit over half the risk for less than half the average return and, therefore, a worse Sharpe ratio. So we have sacrificed return for a less than proportionate reduction in risk. Obviously, we could be doing worse than this too. I guess it depends on what your expectations are.

Career Update

I bought the ticket for the interview in Cloud Cuckoo Land - $2947. That's a bit over the budget they gave me of Euros 2000. A direct flight to the capital seemed to come out even worse and then I'd need to get a train for 2 1/2 hours. So I'm flying to Frankfurt and then flying to the city in question.

In the meantime in Australia I am making progress on getting a permanent job despite some setbacks. It looks like a position I can apply for will again be advertised soon and there are various developments I am pushing which would provide a course for me to teach and collaborations with other areas in the university.

P.S. I took my suit to be altered to fit my new smaller size. It was big when I bought it but for some reason I believed the salesman that that was OK. Since then I lost a few kilos in weight. The alteration cost is less than a new suit of that quality and I think it will look better than when I first bought it when this guy is done with it. He altered a suit for me once before many years ago and also adjusted Snork Maiden's wedding dress.

Buffett Advises Against Long-Term US Bonds

Buffett speaking in India

In a recent post I referenced the Credit Suisse report that argues quite reasonably that long-term bonds are unlikely to be a good investment going forward. Of course, if you believe in efficient markets the prices of long-term bonds should already reflect that interest rates will rise in the future and, therefore, buying long-term bonds now should still be an OK investment. US short-term government bond interest rates remain near zero, but interest rates on 30 year bonds have risen significantly since the depths of the financial crisis:



History suggests though that the adjustment is insufficient. The Credit Suisse Report shows that there are long periods where bonds do not beat inflation in most countries with the partial exception of Switzerland. Now Warren Buffett warns against owning long-term US government bonds. His concern is both that inflation will reduce the real value of the bonds and that the dollar will fall in value against other currencies due to inflation in the US. It's hard to imagine the US Dollar falling in value a lot against the Euro, Pound, or Australian Dollar given how cheap things are in America but against developing country currencies such as the RMB that is possible.

My mother has a short-term USD bond fund and a longer-term Sterling related bond fund. We do want to reduce both of these and especially the latter. Snork Maiden and I have a variety of exposures to bonds though the total is only a small apart of our portfolio. The exposure is only 5.7% of net worth in total. The most significant types of bonds are Australian fixed interest and US corporate and mortgage related bonds. The latter are the main holdings of the CREF bond market fund, which did surprisingly well through the financial crisis (we should have had more of it):



This small level of exposure should be safe I think and I don't intend to lower it.

Job Interview on the Other Side of the World

Just heard. About one month's time.

Adjusting my Mom's Portfolio

We (my brother and I) are planning to reduce the allocation to bonds a bit. If you read the Credit Suisse Investment Returns Yearbook I think you'll understand why:

1. We definitely have too much in the Invesco Sterling Bond Fund. By my calculation it is 16% of her total net worth. This is a larger share than when I last blogged on it. This large share was all due to a mistake by Citibank... I plan to halve the allocation to this fund.

2. I plan to reduce the Janus Short Term Bond Fund by less. The two funds would each then each have about the same amount of money in them.

Also we want to:

3. More than double the investment in the Man-AHL fund. Visit these links to find out why I like managed futures.

4. We will ask for suggestions from the bank for new funds and asset classes to invest in. Including real estate and even alternative bond funds. Any recommendations from readers will be welcome. We can't buy US mutual funds but we can buy some international marketed variants.

Generally, we want to rebalance and diversify.

We also need to move some money around for my Mom's expenses and generally try to reduce the number of accounts she holds in different countries. We still have some problems left over from when my father died in 2002 with accounts still in his name that banks and government are being obstructionist about. You'd think that joint accounts would transfer automatically to the surviving spouse. But it isn't so simple always. If you are married I strongly recommend having some money in your own name in case you end up in a legal limbo too.

iSoft

iSoft (ISF.AX) suspended its shares pending an "announcement". I just wish companies would explain something about why they are halting trading. The Guardian has the story. Apparently a partner firm looks ready to buy them out. My interest is due to our holding of Oceania Capital Partners (OCP.AX) who made a disastrous large investment in iSoft. Most of the loss of value happened very quickly last June and as OCP is trading way below NAV I didn't sell. OCP is also in a trading halt. At the current share price we are making a small profit of a few hundred dollars on our investment in OCP. At the NAV we would be making a profit of several thousand dollars. And the company is in the mode of winding up and returning capital to shareholders. With all these companies returning capital we need at some point in theory to make new investments in the private equity and hedge fund asset classes. The question is whether we can find good investments of that sort.

Facebook

I thought I was just editing and improving my Facebook profile. It already said I was married but not to whom. So I updated that information. A bunch of Snork Maiden's "friends" now think that she just got married and sent her congratulations! Three years late. Only one of my 9 friends commented (on LinkedIn I have about 120 connections). Yeah, I don't understand Facebook much at all.

Over-reaction?

The Japanese stock market fell more than 16% in two days. If that reaction is rational it means that the net present value of the future profits of Japanese companies will be 16% lower than would have been without the earthquake/tsunami/nuclear accident. This seems to me to be an over-reaction. How much will Japanese GDP fall this year? The main economic impacts are damage to ports, oil refineries, and power stations on the east coast of Honshu. The impact of the tsunami damage and nuclear issues is unlikely to be very significant by comparison for the whole economy of Japan IMO. Some of these issues will be fixed fairly quickly (I'm guessing the oil refinery damage comes into that category) and others like the Fukushima nuclear power station cannot be fixed. I don't see why any of this should have pushed the German stock exchange 5% down at one point on March 15th. Anyway, I doubled my position in GTAA @ $25.11 using the money I transferred.

HSBC Gave Me a Lousy Exchange Rate

I did a wire transfer of AUD 10,000 from my Australian to my US HSBC bank account. The exchange rate turned out as USD 0.9808 per Australian Dollar. That's about 3 cents from where the official exchange rate was. That's really bad I think. Maybe I should have done the conversion to US Dollars at the Australian end. Would that have given me a better exchange rate?

More Hedge Fund Returns for February 2011

Credit Suisse-Dow Jones provide some preliminary results:



These show stronger overall performance and more variation among strategies than the HFRX results. HFRI is somewhere between the two:

HFRX Index Performance February 2011

The HFRX hedge fund index gained 0.73% for February compared to 2.16% for the MSCI World stock index. All strategies saw gains and it is hard to see any pattern in the variations across strategies.

Moominvalley February 2011 Report

As usual everything is in USD. The AUD rose a little from 99.8 US cents to 101.7 US cents. This improved our returns in USD terms. World stock markets rose with the MSCI World Index gaining 2.16% for the month. Here is the summary account for February:



Non-investment income and retirement contributions increased as I earned money for the first full month at my new job (I started 10th January). Retirement contributions are up too of course. 19% of my pre-tax salary is going into my retirement account - (% is a contribution by my employer on top of my nominal salary and 10% is a voluntary contribution by me from the stated salary). The numbers should look like this throughout this calendar year now. Expenditure was a little high at $4,608, though there are some good reasons for that. Underlying investment returns were good.

Net worth rose in USD terms by $28k (rose by $A18k in AUD terms to another post GFC high) to $526k ($A517k) and all time high in USD terms.

There was little change in investment allocation. Investment return was a gain of 4.07% in USD terms. In AUD terms we gained 2.05% and in currency neutral terms 2.66%. All asset classes gained. Australian small cap and US stocks were the best performers in currency neutral terms followed by private equity.

What am I Going to Do with the EAIT Money?

As I mentioned I just got paid out $A7,500 or so from EAIT. With that and my next paycheck I'm going to buy $10,000 worth of US Dollars. i.e. move the money to America. I'll probably end up investing some more in GTAA when the move is over.

Another Letter from the US IRS

I got a another letter from the US IRS. The good news is that they accept the tax return that I prepared and my payment of $30.10 in taxes for 2008. The bad news is that now want me to pay penalties and interest. A penalty of $30.10 for filing late, a penalty of $2.86 for paying taxes late, and interest of $4.01. So I'll send them a cheque for $36.97 and hopefully that will be the end of the saga.

Draft Outbound Foreign Investment Rules Released

The Australian government has finally released the draft of legislation intended to replace the FIF rules. From my reading of the information provided, only funds that invest in debt and do not distribute 80% or more of profits would be included in the new rules. More interpretation is available here.

Based on this, the kind of investments that I'm interested in should not be captured by the new rules and I will be able to invest overseas without worrying about complicated tax rules.

EAIT Terminated

Everest Financial is winding up. I should get a payout of $A800 next month as part of the run-down. Now I got a letter from One Managed Investments who took over the EAIT fund from Everest that they terminated the fund on 11 February and are now managing just to pay out the investors. We should get a return of capital of 88.2 cents per share (i.e. about $A7,500 for me) on 1 March and the rest over the next four years. The delay is because the underlying hedge funds have "lock-up" periods.

The question is whether I should look to reinvest my capital in other hedge fund opportunities. If all goes to plan I did actually make some money on the EAIT fund (about $A3,000). I lost a lot investing in Everest Financial, the management company. Logically, the latter shouldn't deter me from investing in hedge funds. But the drawn out saga of EAIT has certainly made me more wary.

HFRX Performance for January 2011

Overall hedge funds gained 0.56% in January according to the HFRX index. In comparison MSCI World Index gained 1.59%. Equity hedge and market neutral strategies and systematic diversified strategies had negative returns. The Man-AHL managed futures fund lost 3.74% in January so the latter is not surprising.

Moominvalley January 2011 Report

As usual everything is in USD. The AUD fell a little from 102 US cents to 98. This hit our returns in USD terms. World stock markets gained a little with the MSCI World Index gaining 1.59% for the month. Here is the summary account for December:



Non-investment income and retirement contributions increased as I earned my first paycheck at my new job. Expenditure was pretty reasonable at $4,193. Underlying investment returns were modest and a little negative in USD terms.

Net worth fell in USD terms by $3k (rose by $A10k in AUD terms to a post GFC high) to $498k ($A499k). Here is the net worth chart in AUD:



For USD see last month.

There was little change in investment allocation. Investment return was a loss of 1.36% in USD terms. In AUD terms we gained 1.20% and in currency neutral terms 0.70%. All asset classes gained with the exception of foreign non-US shares. Private equity was the best performer with a 5.01% gain.

Moominmama Portfolio Performance January 2011

The MSCI World Index gained 1.59% in January. Moominmama gained 0.98% but not because of equities performance. The gain is mainly due to the strong performance of Sterling this month. Most of those bonds are Sterling related bonds. Hedge funds also did well. Indian and Brazilian stocks and the local currency performed very badly.

The Importance of Going to a Good University

If you think it is not important to go to a good university then read this first. Some PF Bloggers recommend to just go to a cheap school.

There are some caveats though. I commented recently on Enoughwealth's post on high schools saying that if you are going to go to university then mostly it doesn't make sense to pay a lot of money to go to the most prestigious high school. But you do need to go to a good one. One that could get you into University of Sydney or UNSW in the Australian case or into one of the top US universities (any of those mentioned in this article). If you definitely plan on going to grad school then it's not necessary to get into the top US universities as an undergrad if it means shelling out big fees. But you do want to go to a good school. Somewhere like UCLA or NYU or Boston University or even Ohio State (Columbus campus). If you do well in places like that you can have a shot at top grad schools. But if you get an undergrad degree from Southern Cross U. or UCQ in Australia say or Cal State U. or somewhere in the US it will be a struggle to get into a good grad school. Likely they will just toss your application unless there is some compelling evidence of your brilliance. And if you get a grad degree from some low ranked university it might not help your employment prospects much at all.

Of course, all this depends on how ambitious you are. I didn't really understand the game fully when I was a student. I knew you needed to go to good universities and went to three good universities. The first two were top-ranked in their country. The third one was good but not in the top-rank. Now I regret somewhat * not trying for the top-ranked place that one of my professors at school #2 suggested. I just thought there was no way they'd consider me or give me any funding. But I could have tried for $50 or whatever the application fee was back then.

I had a job interview on Friday. The head of the department said to me: "I don't know why anyone would come do a PhD here if they could go to that other university across town". I agree with him on that. In economics at least, the name of the school matters.

* Only somewhat because if I had gone there (in the picture) rather than across the river I doubt I would have ever met Snork Maiden. And after all I have done pretty well in my academic career so far.

GTAA Lowers Fees

Cambria's GTAA ETF has raised $72 million so far and so is lowering the expense ratio to 0.99%.

In other news, hedge fund assets hit a new record:

"HEDGE FUNDS END 2010 WITH RECORD QUARTERLY ASSET INCREASE

CHICAGO, (January 19, 2011) – The hedge fund industry concluded 2010 with the largest quarterly increase in assets in its history, according to data released today by Hedge Fund Research (HFR). Total industry assets grew to $1.917 trillion, reflecting a quarterly increase of nearly $149 billion, topping the previous record increase of $140 billion in 2Q07.

The year-end figure approaches the historical asset peak of $1.93 trillion set in 2Q08 and represents an asset increase of 44 percent since 1Q09. Hedge funds as represented by the broad-based HFRI Fund Weighted Composite Index posted a gain of 10.5 percent, but full-year gains were concentrated into year end, with the HFRI gaining over 5.5 percent in 4Q10."

Street View vs. 3D View

Google Earth has now added 3D trees in some parts of the world, including San Francisco. Here is a random street in SF in 3D view:


And in Street View:



hmmm Were some trees removed or has Google added some random ones in? When's 3D cables coming? :P BTW, Street View is much improved on the previous version and really easy to navigate around in. You can see what high speed internet is really for! :) I've always been amazed by Google Earth and it keeps getting more amazing.

Weight Loss

When I cam back from Europe I found I was 2-3kg lighter at least than when I left and I decided to try to keep losing weight. I had been trying half-heartedly for a while. I've now been keeping a daily weight record for almost three months. The results look like this:



The scale is in kilograms (multiply by 2.2 or divided by 0.454 to get pounds). I'm 1.90m (6' 3") tall so that should explain why the number might look big to you if you're not so tall. As you can see, my initial enthusiasm wore off but I still seem to be losing weight. I've averaged a loss of 34 grams (just over an ounce) a day. Initially though it was about 67 grams a day. Mainly, I've tried to eat less at each meal, especially less bread and less rice and cut out calories for the sake of calories in the form of alcohol etc. And eat fewer and lower calories snacks. There is nothing I stopped eating completely though and I don't measure how much I eat. I just try to moderate as much as possible. This has worked before for me and it seems to be working now. It will take about another 9 months at this rate to get me down to my real target of about 90kg. I'm pretty happy to be approaching 100kg again though.

Downside is that neither of my two suits fits me now. One is too big and one too small. I don't want to get the big one adjusted to my current size though... I'm thinking anyway a suit will be too hot for my next interview and I'll just do the shirt and tie thing. This is academia and though it is part of a business school I noticed the pictures on the website of people are not wearing suits and ties.

Career Update

I had a phone interview with one college in the US but I heard on Saturday that I'm not being invited to the on-campus interview unless they don't like any of the candidates they have invited. In other words, I'm a back up candidate again. Haven't heard from any other US jobs yet but I suspect we'll be staying in Australia for now. I scheduled my interview for a job in Sydney in less than 2 weeks time on Friday.

How Much Should I "Salary Sacrifice" into Superannuation?

I'm starting my new job and looking at the contract details. I was a bit surprised that my employer will only pay 9% of my salary (i.e. on top of my stated salary) into superannuation (retirement). That is because public sector employers in Australia normally pay more than that. But they can get away with this for a short-term contract. Usually, at this employer, when the employer pays 17% in, employees are required to pay in 8%. Snork Maiden's employer pays 15.4% and we salary sacrifice $225 every 2 weeks into her super account. The latter is about 7%. So what should I do here? There is a cap of $25,000 per year in super contributions of course, so I can't go beyond that. Should I go for:

1. Zero

2. The same % as Snork Maiden

3. The 8% level

4. Go to the maximum allowed level?

The downside of going to the max is of course that we can't then access those contributions for 14 years at least. The upside is the contributions face a lower rate of taxation - 15% going in instead of my marginal rate of 31.5% this financial year and possibly 38.5% next financial year. When in the fund, rates are also lower than I'd probably pay in the long term and when I retire I could get the money out tax free.

If I was 10 years older, I would for sure choose the maximum contribution level.

P.S.

As noted in the comments, I might not be able to do salary sacrifice in this position anyway. I'll ask about it tomorrow. I'll also be increasing our automatic savings contributions to non-retirement accounts. I think from $500 per month each to $1,000 per month each.

Annual Report 2010 Part IV Investment Returns

The MSCI All Country World Gross Index gained 13.21% for the year while we only gained 9.78% in USD terms. But over the last two years we gained almost double the index. Over 10 years we also outperformed the index but over the last 3 or 5 years we underperformed. Relative investment performance matters a lot depending on the period measured. In Australian Dollar terms we have lost over all but the 2 year time frame and even in currency neutral terms the long-run return has been about zero. It hasn't been a good period for investing.

HFRI Hedge Fund Index Performance December 2010

With the exception of short bias, all styles gained in December and for 2010 as a whole. Both the month and the year saw strong stock market performance globally in USD terms. The top performer for the year was funds that specialised in energy and basic materials. That's not too surprising.

Annual Report 2010 Part III (AUD Version)

In contrast to the USD version investment returns were negative, even in currency adjusted terms.* Still, we did manage some gain in net worth in AUD terms. The breakdown of needs, wants and saving is based on a monthly spending of $A3,500 as being sufficient to cover needs and everything above that is a "want". Monthly spending is never below the $A3,500 level but sometimes reaches it when we are frugal. Our monthly rent is $2,042 at the moment, so that spending level is not that high. Of course, we could spend less on rent if we wanted to...

* As explained in the previous post, this is due to summing each month's results while exchange rates swung wildly from month to month. If very negative returns occur when the Australian Dollar is strong and positive returns occur when it is weak the annual currency adjusted result could be negative in AUD terms and positive in USD terms.

Annual Report 2010 Part II (USD Version)

Part I is here and last year's report here. This year was not as spectacular as last year financially but still pretty good. Expenditure was higher and income lower but we still spent less than we earned. We saved about a quarter of non-retirement non-investment income (which is what the spending 76% number indicates) and net worth rose by about 20% in USD terms to almost $1/2 million. There was about equal growth in retirement and non-retirement accounts. Non-retirement accounts made about $5,000 of real income adjusted for exchange rate moves, while retirement accounts lost about $1,000.* Soon, I'll present the results in Australian Dollar terms which will look a lot different.

* This is when income is adjusted for exchange rate moves each month and then summed for the year. To get the currency neutral income, each month we sum investment income for that month using the exchange rates at the end of the previous month to convert amounts in different currencies. If we summed all income for the year using the previous year's exchange rates the decomposition would be different.

Christmas Day @ Bateman's Bay NSW

A New Scam

I hadn't seen this scam before:



The attached cover e-mail was more illiterate than this.

Moominvalley December 2010 Report

As usual some data will lag for a month or more but here are the accounts based on the information I have at the moment. And as usual everything is in USD. The AUD rose strongly from 96 US cents to $1.02, which is a record level since the Australian Dollar was floated in 1983. This hit our returns in AUD terms and boosted them in USD terms.World stock markets gained strongly with the MSCI World Index gaining 7.35% for the month. Here is the summary account for December:



Non-investment income was more normal this month as it is just Snork Maiden's regular salary minus the check I sent to the IRS. Expenditure was pretty reasonable at $4,296. Investment returns in USD terms were very strong, but more than half the gain came from the rise in the Australian Dollar.

Net worth rose in USD terms by $43k (rose by $A13k in AUD terms) to $500k ($A488k). This is a record monthly close in US Dollar terms.



Actually we are about $100 short of the half million mark.

Allocation-wise the main change was a rise in the share of large cap Australian stocks due to the market and a reduction in the allocation to hedge funds due to my sale of Platinum Capital shares.

Investment return was a gain of 9.15% in USD terms. In AUD terms we gained 2.44% and in currency neutral terms 4.31%. All asset classes gained with foreign shares and private equity the best performers.

Long Run US Stock Market Returns

An update on the famous chart, that I first saw in Unexpected Returns:



Returns are measured relative to inflation. Here is the key:



For example, if you invested in 2000 and withdraw your money in any year since you would have made less money than inflation. Investing in 2008 and 2009 though has generated nice returns. Investing in any other year since the mid 1990s has resulted in negative to low positive returns. And that's the period I have been investing in...

Returns seem to move in waves, shown by the red and green patches on the chart. Maybe we are entering a new wave of positive returns? It would be nice to think so!

Asset Returns for 2010

From Paul Kedrovsky:



Being long a bunch of commodities would have been a good idea. But Australian stocks fell. I'm assuming that that doesn't include dividends. Including dividends the return would have been positive. And measured in US Dollars very positive. It looks like our portfolio lost about 2% for the year in Australian Dollar terms but gained 10% in US Dollar terms.

Moominmama Portfolio Performance December 2010

This month, world stock markets performed strongly with the MSCI index rising 7.35%. Moominmama's portfolio only gained 2.81%:



Bonds, Sterling, and hedge funds all performed relatively weakly, though positively, which because they are each a large share of the portfolio brought down the overall return. The negative return on USD cash reflects investment management fees which are deducted from this asset. All equities as well as commodities performed strongly as did the local currency which is what "other cash" is and the real estate value moves with the local currency against the USD as well.

For the year the portfolio gained 5.52% compared with a 13.21% gain in the MSCI. Our own portfolio gained roughly 10% for the year. The portfolio is still in rebound from the GFC, though within the range of the previous highs:



The majority of individual funds are now showing a positive rate of return since we bought them. This includes half the funds we bought in 2008.

US Tax Return Done

Well, there's still some printing, copying, and mailing to do. I wrote a check for $30.10. I had $98 withheld from dividends in 2008 but I didn't update all my brokers with the fact I was now non-resident in the US and so they didn't withhold the correct tax. I am sure the IRS has expended much more than $30 worth of effort on this. I certainly have and still need to pay for express mail, copying etc.

But if I didn't speak English so well and have a good handle on financial stuff I might have ended up hiring a US lawyer or accountant to deal with this at a huge expense.

Let's see if the IRS try to get me to pay a penalty on the $30...

Working on my 2008 US Tax Return

So, I'm finally working on my 2008 US tax return in the Christmas break. The main reason why I have put this off is that it is going to be a lot of work. First, 2008 was a chaotic year and I have to revisit all the trauma to put the data together. Second, Australia has a 1 July to 30 June tax year. So all my records are now set up on that basis for doing my Australian tax returns. The first step will be constructing an imaginary Australian tax return workbook in Excel for the 2008 calendar year. Then I can use that data together with the spreadsheet I created for my 2007 US tax return and a close reading of the 2008 US Non-Resident Alien tax instructions to come up with my 2008 US tax return...

Advantages of Closed End Funds

A nice piece on the advantages of closed-end funds. The downsides include:

1. If you need to sell but the fund is trading at a discount to NAV you lose more than if you bought a mutual fund, ETF, or closed end fund when the manager makes a market to ensure the price is always equal to NAV.

2. Activist hedge funds may buy up shares at a discount to NAV and then demand that the fund be wound up. This is good in the short-run for investors but removes funds from the market. We saw this in the GFC here in Australia.

I just sold some shares in Platinum Capital today at a premium to NAV. The manager has introduced a capital management program that should mean premia do not rise as high as they have in the past. So I thought it was time to sell a few shares.

Hedge Fund ETF

UBS and HFR have launched an ETF that tracks the HFRX Global Hedge Fund Index. Prices are available on Yahoo. These seem to indicate that it costs E50k per share?! The press release below says it targets "qualified investors". Maybe this is through the choice of the high price? Apparently the ETF is invested as a swap. They mention further listings to come. I'll be waiting with interest.


December 17, 2010 (Chicago & Zurich) – UBS AG and Hedge Fund Research (HFR) have launched the UBS ETFs plc - HFRX Global Hedge Fund Index SF, the first Exchange-Traded Fund (ETF) built on the industry’s most widely used standard investable benchmark of hedge fund performance globally, it was announced today.

The UBS ETFs plc - HFRX Global Hedge Fund Index SF-I was listed on the Deutsche Boerse Exchange on 3 December 2010 (symbol UIQG). The “SF-I” share class is targeting qualified investors. UBS and HFR anticipate additional listings in coming weeks. The ETF is UCITS III compliant.

With performance dating back to 1998, the HFRX Global Hedge Fund Index is the industry standard for investible hedge fund indices, offering investors access to the benefits of passive indexation in the hedge fund industry. The benefits are achieved through consistent fund selection, leveraging HFR’s industry standard database and classification structure to calibrate strategy weighting and optimize individual fund weightings.

One of the world’s leading financial firms, UBS is headquartered in Zurich and Basle, Switzerland. UBS serves a discerning and international client base with its wealth management, investment banking and asset management businesses. UBS is present in all major financial centers and has offices in over 50 countries. UBS employs more than 64,000 people around the world.

HFR is headquartered in Chicago and is the industry leader in the areas of aggregation, indexation and analysis of the hedge fund industry. The partnership for the ETF leverages the core strengths of both firms.

"We are delighted to bring the UBS plc ETF-HFRX Global Hedge Fund Index to the market. This is a unique opportunity for investors to access the world-leading hedge fund benchmark in a liquid, exchange traded, UCITS compliant form," said Nicolas Samaran, Executive Director in the Fund Derivatives Structuring Group at UBS AG.

“The UBS –ETFs plc - HFRX Global Hedge Fund Index SF represents the first in a new generation of hedge fund index ETFs, offering investors the ability to gain passive exposure to hedge fund performance in a transparent, liquid, and UCITS III compliant manner” said Kenneth J. Heinz, President of HFR. “The construction and versatility of the ETF enables it to be used broadly by both institutional & retail investors to obtain hedge fund exposure efficiently.”

Good Procrastination

I wish I could be better at this. I accused Timothy Ferriss of being too good at it.

Another Interview

This time in the nearest big city in a month and a bit...

Two Months to Go

Two months to go from today until I teach my first class. Three months till the next deadline for grant applications - though the real deadline is before that. And there a bunch of shorter term research demands coming in. So, it doesn't look like I'll be getting much of a summer vacation :) I don't have a contract yet for the new job and things move very slowly here but that doesn't stop me starting preparing for teaching. For example, here I have to find the teaching assistant who will help me with teaching the breakout groups called "tutorials". At least I have a textbook ordered, my own copy and all the materials from last year and the last time I taught a similar class in the US. The problem is that now most of the people who can help me with the details of scheduling etc. have all gone on vacation. At least I got to meet some and get the basic before the Christmas period started.

Taking a longer term perspective it is just over two years since I decided to get back into my academic career. Since then I have managed to get two one year jobs - the first one in research and the second in teaching/research (the one that I'm sorting out the details for now). I got a little consulting and a paid visit to Europe in the gap in between. I got several academic papers published in 2010 and three are already lined up for 2011 with about another three in various stages of review. I've also had several interviews for longer term jobs but no offer yet. I feel that am more productive and creative on the research side than I have ever been in my career at least since I did my PhD. So I think I made the right decision and that I have had about as much success as I could have hoped for.

How Accurate are Rich Lists?

I always wondered how accurate lists such Forbes are. The payout to the Madoff trustee that Jeffrey Picower's widow is making shows that Jeffrey Picower was at least notionally likely one of the richest US billionaires, but barely on the radar.

Annual Summary and Forecast for 2011

The chart breaks down net worth into four components - net money saved in retirement and non-retirement accounts and the profits on both those categories of accounts. We have currently saved just over $A250,000 outside of retirement over our lifetime, but profits are negative and so we have less than that in those accounts. Profits on retirement accounts are currently positive so we have more in those accounts than we contributed to them.

We managed to save money in both types of accounts in 2010, even though for 9 months of the year only one of us had a regular job. I brought in some consulting money when I wasn't regularly employed but it was much much less than I would have in a regular job. The dip in the savings curve is due to the trip we made to Europe. The costs of the trip were easily funded by the refunds we got and the money I earned there. But we only got that money towards the end of the year. Retirement saving was $18k and non-retirement $19k.

Earnings on accounts were negative for the year in Australian Dollar terms. At this point we are down 3.12%. But in US Dollar terms we've gained 7.08%.

The forecast for next year looks pretty rosy as we both expect to be working full time. This might not work out exactly this way as big changes could happen... If we do, we are expecting to save more than $100k, about 1/3 of it in retirement accounts and 2/3 outside retirement. The profit curves imply a rate of return of 12.3% p.a., which of course, may or may not happen. It is based on bottom up modelling of returns on individual assets in a spreadsheet. Remember that we use some leverage in investing.

It will be interesting to see what next year will actually be like :) I don't think I did a forecast or goal setting exercise of any sort last year. There'll be some more annual report posts in the next few weeks probably.

HFRI Performance November 2010

HFRI came in with a preliminary 0.26% gain for November compared to a small loss for HFRX. Most of the results for the different hedge fund styles are pretty similar to HFRX this month too.

Career Update

I am still waiting to get a formal contract, but this is based on what has been discussed. I should have a job for one year doing teaching and research. It's on the same campus I have already been based at but in a different department. The position is at a level equivalent to full professor in the US, though it's not called that here and of course it is temporary. Pay will be the first time I am earning a six figure salary. At the current exchange rate that's six figures in US Dollars too but it doesn't buy as much here.

The first course I have to teach is pretty much the same as the first half of a course I taught in the US and even using a different version of the book by the same authors, so shouldn't be too hard. Main difference is these are grad students rather than undergrads but this course isn't in their discipline so the difference between grads and undergrads isn't that big. So the teaching shouldn't be hard though I've never taught in Australia before.

This department is advertising a bunch of continuing positions but none is really in my area. I heard though today that a university in the nearest big city is looking for someone who fits my profile well. But, I applied there last year and didn't get an interview. But I'll give them another chance. I also got an invite for a phone interview with a US university.



So far I've proved that you can quit a job as a tenured professor, move country, take a year out and still get decent work in academia, at least some of the time :) The experiment will only be a full success though when I get a continuing position or a major grant. But you do need to have a good reputation and be prepared to work without getting paid for periods of time.

HFRX Performance for November 2010

The HFRX daily hedge fund index lost 0.27% for November. Systematic diversified was particularly bad with losses of 3.47% (which explains Moominmama's losses on "commodities"). Equity market neutral did well as did "fundamental growth" which is also an equity hedge strategy.

Moominvalley November 2010 Report

As usual some data will lag for a month or more but here are the accounts based on the information I have at the moment. And as usual everything is in USD. The AUD fell a little to 96.06 US Cents so there is a little more difference between US and Australian Dollars this month.



Non-investment income was again high this month because I got a tax refund. Snork Maiden earned her regular salary. Expenditure was near base levels at $3,612, which is a lot less than the average for the year.

Investment return was a loss of 2.64% in USD terms against -2.79% for the MSCI Index. So we slightly outperformed the market. In AUD terms we gained 0.06% and lost -1.19% in currency neutral terms. Over the longer term, we see periods where we have outperformed the market and periods where we underperform:



The chart shows the excess return relative to the MSCI World Index since the month indicated in annual terms. So since February 2003 we have made about 2.5% a year more than the MSCI but since July 2005 about 2.5% per year less. This shows the importance of investigating the returns of investments over various time frames. Just looking at performance over the last 3 years, for example, could be very misleading.

Net worth fell in USD terms by $7k (rose by $A6k in AUD terms) to $459k ($A477k). Allocation-wise the main change was a fall in large cap Australian stocks due to the market and a gain in cash and fall in leverage.

Small Cap Stocks are Doing Well

As I'm working on November's accounts I was checking out which of our investments are at all time highs in profits gained:

CFS Developing Companies
CREF Bond Market
TFS Market Neutral (TFSMX)
Celeste Australian Small Companies
CFS Diversified Fixed Interest
Aurora Sandringham Dividend Income Trust (AOD.AX)

CREF is a US annuity and the others are Australian managed funds, so none of them have ticker codes. AOD is actually invested in large caps using a hedge fund type strategy. But the others are small cap and bond funds. Small caps do tend to outperform large caps during economic recoveries. So this is not surprising.

Career Update

I finally got answers on the two jobs I interviewed for at the beginning of November. I didn't get either. So looks like I will be taking up the offer I had of a one year position here.

I guess I am doing OK in this career search. I get interviewed for jobs I apply for but don't end up the top candidate. Academia is very competitive. Just to get into the interview pool means you are in the top few percent of applicants.

The main thing is that we'll be earning decent money in 2011 if all goes to plan from now on. The department I will likely be working for has some continuing positions that will soon be advertised but I'm not really a perfect fit for them. I'm going to keep applying elsewhere and try >another shot at funding my own position through a grant. The rules look like changing on the latter which might let me apply this time around. At least I have last year's efforts to start from.

Moominmama Portfolio Performance November 2010

Moominmama lost 2.51% this month against a 2.80% loss in the MSCI World Index. The US Dollar strengthened causing losses in terms of US Dollars. US equities actually gained. Bonds and commodities had the worst losses in the portfolio.

Can't Invest in new TIAA-CREF Funds

It's good I didn't do too much research on the new funds available from TIAA-CREF. It turns out that, because I don't live in the United States, I can't invest in them anyway.

Career Update

So I had two interviews and haven't heard back yet. I have now sent 4 applications out to the US - 2 on the West Coast and two on the East Coast, 1 to Europe, and one to another city in Australia. I'm discussing with someone at another university in that city about whether to apply for the job they're advertising (well, I'm getting more info as last year I applied and was rejected without interview). And then a short-term and long-term opportunity here have possibly cropped up. We discussed the short-term deal here months ago and I thought it was then off the table. But I was just told that it was mentioned that an offer had been made to me and I hadn't taken them up on it. So on that basis I should have a job from January for a year. I'll meet the guy making the offer at a conference in the next few days and will raise it with him there. I'm guessing he'll still want to wait the outcome of the two interviews mentioned above but there is light at the end of the tunnel after a lot of twists and turns...

Also at one of the US locations there is also a possibility that a position could be created for Snork Maiden in a different unit.

Tax Refund

It came in pretty close to my estimate at $A 4231.81. The money will go towards reducing margin debt and maintaining my monthly $A500 investments in a managed fund. Yes, we've managed to keep both mine and Snork Maiden's automatic savings going over this period (no retirement contributions for me though). The recent round of interviews and presentations ended today, should send out the next application ASAP... Seems like they went OK to well. We'll see what the search committees think.

Interviews/Applications

I had the interview I mentioned before on Thursday. It went OK. It wasn't my best performance in an interview but I wasn't horrible. I really don't know what the outcome might be. One positive I didn't know about is that they need someone to teach in my area of specialization as the person who was teaching those courses has left.* Then on Friday was part I of another interview in my home town here. This was just a friendly chat with some general representatives of the department. One academic who I know well and two PhD students. Neither of us had much clue about what we were meant to discuss. I asked them some questions about the department and they asked me some. The more serious sessions are on Monday and Tuesday. It is a lower rank position at a very interdisciplinary place.

In the meantime I just sent an application in for a job in Austria. Yeah, it's hard imagining that I'll be able to teach in German any time soon, but I'm curious what happens. I was indirectly invited to apply.



* This isn't the usual academic job search where specializations were specified in the ad. They are looking for the best people in any area of the overall discipline.

US IRS Again

I got a rather threatening sounding letter today from the IRS regarding my 2008 tax return. But they did invite me to phone them to discuss the issue, which I just did. The problem was as I suspected that investment stuff was reported to them, probably by Interactive Brokers as if I was a US resident and without tax being deducted at source, yet I didn't file a tax return. The IRS will now send me a copy of what was reported to them so that I can prepare a 1040NR form for 2008 by December 15th. It's possible/probable that I don't actually owe any tax. The woman I spoke with told me that the amount I owe for 2009 is too small to file a tax return, but that they think I owe $2,000 for 2008. I have now changed my residence status with Interactive Brokers to record me as resident in Australia and this problem should be solved.

Moominvalley October 2010 Report

As usual some data will lag for a month or more but here are the accounts based on the information I have at the moment. And as usual everything is in USD, though it doesn't make much difference as the Australian Dollar hit 97.96 US Cents (and higher intra-month). Of course, it does make a difference when it comes to computing gains and loss from foreign exchange movements...



Non-investment income was very high this month, because I got paid for my trip to Sweden. 25% tax was taken out. I was also paid for travel expenses. After all that I got about $7,500. Snork Maiden earned her regular salary. Expenditure was a little high but we were having fun in Copenhagen and Bangkok :) Actually, the biggest expenditure was for car insurance: $A797.30. Over the last year we've averaged $A5,300 a month in spending.

So in total net worth rose by $23k ($A17k) to $465k ($A475k). A few days ago I posted our detailed investment allocation. There was relatively little change in the asset class allocation for the month. The main changes were an increase in bonds and commodities due to buying GTAA.

Investment return was 3.40% in USD terms against 4.28% for the MSCI Index. So we somewhat underperformed the market.

Moominmama Portfolio Performance July-October 2010

I haven't updated Moominmama's portfolio for a while due to my world travels. So this update covers the months of August, September, and October:



The rates of return are for the three months, and are not in "per month" terms. There have been nice gains in equities, bonds, and commodities over this period. Part of it is due to the fall in the USD. But gains in Sterling and other cash are much smaller, so a lot of the gain is real. Some of the funds we bought in 2008 are now finally above the prices we paid - the UBS Asia Ex-Japan Fund and the HSBC Indian Equity Fund. Man AHL has fluctuated above and below what we paid this whole period but is currently above ($46k vs. $40k). Funds from 2008 that are not yet above what we paid are: Aletheia, Thomas White, UBS A&Q Hedge Fund, UBS Agribusiness Certificate, and UBS Brazil Fund.