Equinox Performance Report September Quarter 2007 MACQUARIE equinox TRUST series
Market Commentary Stepping into the third quarter, evidence of further weakness in the US housing market dynamics caused a dislocation in the sub-prime structured credit market and heavily weighed on the financial sector across developed markets. This reverberated through the overall structure of US and global credit markets due to the sharp re-emergence of risk aversion and a swift repricing of corporate credit risk. Sectors that experienced the greatest negative impact were those perceived to be most vulnerable to the credit environment and the economic cycle including financials. This risk retrenchment caused turbulence in financial markets in the latter part of July and all throughout the month of August. Throughout the quarter though, it was increasingly and widely understood that developed markets were experiencing a very challenging credit and liquidity crunch, in part reflecting a markedly shrinking risk appetite by both investors and lenders. Ultimately, the side effects of this crunch were felt across many asset classes. In the second half of July, and in a clear signal that risk reduction was gaining hold of investor psychology, the MSCI World Index reversed an intramonth 3% gain to finish July with a 2% loss, yields on sovereign bonds deflated (with US 10-year Treasury yields falling by circa 30 basis points to 4.7%), the Japanese Yen and Swiss Franc rose against the US dollar and high yielding currencies (such as the Australian and NZ dollars) and credit spreads suffered their sharpest widening in five years. The flow-on effects of the global credit and liquidity crunch caused significant downdraft in emerging / Asian financial markets in August, a month that was difficult by any measure. End-of-month performance masked the sizeable intra-month peak-to-trough equity index price falls in emerging and Asian markets (example of which in Asia where - initially dropping 12% by August 17 - the MSCI AC Asia Pacific Index recovered and finished down 2.4% for the month). In developed markets, a synchronised injection of US$350 billion of liquidity into money markets mainly by the central banks of USA and Euroland, coupled with the US Federal Reserve s decisive move to lower the discount rate in mid-august, brought some relief and positive sentiment in financial markets. September started in an uneventful fashion and markets were broadly range bound reflecting investor pause following a strong rally into the end of August. However as the month progressed, September brought an extension to late-august s rebound in global markets, courtesy of a partiallyresumed investor risk-taking appetite in part driven by US monetary policy easing on 18 September and receding concerns of a global economic slowdown despite tight credit conditions in US / Europe and further signs of weakness in the US housing market. Global equities resumed their upward trend (in particular emerging markets inclusive of Asia), global credit spreads tightened and equity volatility subsided. It was therefore no surprise that growth-oriented industries and markets enjoyed a disproportionate elevation. In addition, large capitalisation equities outperformed their small capitalisation counterparts in a clear signal that investors are seeking the security of liquidity and corporate income streams that are diversified by both business and geography.
Hedge Fund Industry The hedge fund industry delivered a quarterly result of 0.58% as measured by the HFRI Fund of Funds Index (registering a return of 0.34%, -2.12% and 2.41% in July, August and September respectively). In general, most hedge fund strategies came under pressure in late July and August, however September proved crucial in assisting many hedge funds and strategies recover their intra-quarterly loss. In the environment that characterised July and August, investors started to question the closure probability and profitability of various LBO-based merger and acquisitions that are dependant on the availability of credit at reasonable pricing. This transpired into widening merger arbitrage spreads reflecting the market s concern of refinancing risk associated with leveraged buyouts. In general, eventdriven strategies remained under pressure during the quarter (with the HFRI Event-Driven Index delivering -0.64% over the quarter) as spreads on restructuring and merger and acquisition deals continued to be volatile despite slightly improved backdrop in September which helped recoup some of the prior month s mark-to-market losses. Relative Value strategies delivered a muted result for the quarter (with the HFRI Event-Driven Index down 0.2% over the quarter) as the cost associated with wider credit spreads was compensated for by volatility-based strategies that benefited from volatility expansion which, as expected in such an environment, transpired across global equity markets in both July and August. Perhaps the most significant development in the hedge fund industry during the quarter was the de-leveraging process that took place. As at the end of July, and in reaction to the above-described market challenges, hedge funds started to reduce their portfolio risks as mark-to-market losses began to accumulate, starting with investment strategies employed in the more liquid equity markets. This prompted a large-scale de-leveraging across the universe of hedge funds employing quantitative equity investment strategies, causing excessive price volatility that took all types of equity-based investment managers by surprise. The return to some form of equity market normalcy in September was highly welcome and aided many equity-based managers to finish the quarter in slight positive territory. Although the environment for Tactical Trading in September was conducive to positive return generation given opportunities presented by the recovery in many currencies against the US dollar (specifically the high-yielding Australian and New Zealand dollar) as well as the on-going support many commodities are receiving on the back of a trending weak US dollar, the months of July and August proved very difficult as the global unwinding of carry trades, the flight to quality in fixed income markets and the sharp reversal in global equities caught many tactical traders causing losses mainly in their currency and fixed income positions. Equinox News Changes to the Component Funds in the Equinox Reference Portfolios Based on the recommendation of its Risk Advisor, MQ Capital Pty Limited, Equinox has introduced Artradis Barracuda Fund to the reference portfolio underlying Equinox 6 Trust, Equinox Asia Trust, Equinox Asia 2 Trust and Equinox Select Opportunities Trust. The inclusion of this fund is designed to introduce non-correlated returns to equity markets during periods characterised by dislocation and increased volatility. In addition, SR Global Fund (Class B) Asia a component fund in the reference portfolio underlying Equinox Asia Trust has been introduced to the reference portfolio underlying Equinox Asia 2 Trust. Furthermore, Golden China Fund a component fund in the reference portfolio underlying Equinox Asia 2 Trust has been introduced to the reference portfolio underlying Equinox Asia Trust. These changes took effect on the 1 November 2007.
Equinox 6 Performance Information* Trust name Macquarie Equinox 6 Trust ARSN 113 966 500 ( Equinox 6 ) Inception date 01/07/2005 Net Asset Value (NAV) per unit $1.1055 One month return 3.67% Three month return -0.08% Six month return 5.90% One year return 11.24% Total return since inception 12.88% Annualised return since inception 5.53% Equinox Total Return Index 1 112.88 Current capital protected level 2 $1.0230 Fund commentary The Equinox 6 portfolio returned an estimated -0.08% for the quarter. The underlying component funds produced mixed results with the diversified fund component of the portfolio generating positive returns sufficient to compensate for the negative impact of the extremely volatile market conditions in late July and throughout August on the Tactical Traders. The diversified fund component of the portfolio performed well in Q3 with most of the underlying funds delivering a positive return. MARSA, the Asian diversified fund, and Harbinger, the distressed / special situations fund, provided the lion share of positive returns on the back of strong liquidity-driven momentum / expansion in volatility of Asian equity markets and credit-focused investments that continue to benefit from the value degradation in sub-prime mortgage structured credit respectively. The Tactical Trading component of the portfolio produced a negative return for the quarter. Most of the discretionary traders performance was accretive however it was the systematic trend-followers which were the main detractors from performance due to the sharp to the sharp reversal in fixed income securities, equity markets and currencies in late July and August driven by credit and liquidity induced investor risk aversion
Equinox Asia Performance Information* Trust name Macquarie Equinox Asia Trust ARSN 115 798 368 ( Equinox Asia ) Inception date 01/12/2005 Net Asset Value (NAV) per unit $1.1675 One month return 4.61% Three month return 4.63% Six month return 11.47% One year return 17.50% Total return since inception 19.51% Annualised return since inception 10.21% Equinox Total Return Index 1 119.51 Current capital protected level 2 $1.0088 Fund commentary The Equinox Asia portfolio returned an estimated 4.63% for the quarter. With the exception of MQ Asia Multi-Strategy Fund, all other component funds generated positive performance. The performance of the MQ Asia Multi Strategy Fund was negatively impacted by the massive de-leveraging across many markets in August which caused vicious circles of forced selling of high quality and more liquid securities affecting portfolios of large global multistrategy and equity market neutral managers. Despite a sharp correction in Asian equity markets during August, MARSA was able to protect capital and continue to benefit from the strong liquidity dynamics powering the Chinese and Indian equity markets. With respect to the Single Strategy Funds, SR Asia, ADM and Japan Macro delivered modest positive results for the quarter while Ashmore delivered strong performance due to positive developments for some of its medium-term corporate restructuring situations.
Equinox Asia 2 Performance Information* Trust name Macquarie Equinox Asia 2 Trust ARSN 117 868 336 ( Equinox Asia 2 ) Inception date 01/04/2006 Net Asset Value (NAV) per unit $1.2187 One month return 6.33% Three month return 9.65% Six month return 20.31% One year return 32.76% Total return since inception 29.06% Annualised return since inception 18.54% Equinox Total Return Index 1 129.06 Current capital protected level 2 $1.0220 Fund commentary The Equinox Asia 2 portfolio returned an estimated 9.65% for the quarter. Similar to the Equinox Asia portfolio, the only detractor from what transformed into an exceptional quarterly result was the MQ Asia Multi-Strategy Fund. That aside, all other component funds finished the quarter in positive territory with varying degrees though. Both the Asian diversified fund MARSA as well as Golden China Fund captured a large part of the opportunity set presented in the Chinese H-market which propelled in part due to the Chinese government s decision to allow individual Chinese investors to directly purchase Hong Kong listed stocks without investment limits. Ashmore also handsomely contributed to the quarterly result given progress with some of its core corporate restructuring investments while Sparx Korea, WF Japan and Japan Macro all added to the bottom line.
Equinox Select Opportunities Performance Information* Trust name Macquarie Equinox Select Opportunities Trust ARSN 119 029 355 ( Equinox Select Opportunities ) Inception date 01/07/2006 Net Asset Value (NAV) per unit $1.0706 One month return 3.82% Three month return -2.17% Six month return 5.65% One year return 12.89% Total return since inception 12.09% Annualised return since inception 9.56% Equinox Total Return Index 1 112.09 Current capital protected level 2 $1.0171 Fund commentary The Equinox Select Opportunities portfolio returned an estimated -2.17% for the quarter. The two systematic trend-followers in the portfolio were vulnerable to the global risk aversion and sharp price reversals that engulfed markets in July and August, incurring negative returns the absence of which would have left the portfolio broadly unchanged over the quarter. Ashmore Asian Recovery Fund was the best performer in the portfolio. The diversified fund (Irongate), the Korean Equity Long Short specialist (Sparx Korea) and the emerging market credit fund (Convivo) managed to produce positive quarterly returns despite having suffered losses in August, a month where most asset classes were under pressure. The most consistent positive performance was provided by the Asian tactical trader (Japan Macro) that maintained nimbleness throughout the quarter. *NAV and Performance Information are indicative only (based on estimated September NAVs) and are quoted Cum Distribution. Past performance is not a reliable indicator of future performance. Returns are indicative only and are quoted ex-distribution. Past performance is not a reliable indicator of future performance. 1 An accumulation index of the Equinox NAV per unit which assumes the reinvestment of Cash Distributions. 2 Capital protection is provided to each Equinox trust through an Exposure Agreement and not to each individual investor. Capital protection will only apply on the capital protection date and is subject to certain risks. For full details, you should refer to the relevant PDS. The information pertaining to investment performance of units in each of Equinox 6, Equinox Asia, Equinox Asia 2 and Equinox Select Opportunities does not represent the prices payable on redemption or transfer. Redemption and transfer prices for units in each Macquarie Equinox Trust Series will be calculated in accordance with the methodology set out in the relevant PDS and the relevant constitution. The above information is current as at 30 September 2007.
For further information, including monthly performance figures and interest rates for borrowers, please contact the Macquarie Equinox Service Centre: 1800 025 513 or 02 8232 1181 equinox@macquarie.com.au www.macquarie.com.au/equinox This information is provided by MQ Portfolio Management Limited ABN 55 092 551 611 ( MPML ), the issuer and responsible entity of the Macquarie Equinox Trust Series. It is general advice and does not take into account the objectives, financial situation or needs of any investor. Each investor should consider the appropriateness of this advice having regard to these matters, and read the relevant Product Disclosure Statement ( PDS ), before making any investment decision. The PDS for each Macquarie Equinox Trust Series is available from MPML by calling 1800 025 513. Investments in the Macquarie Equinox Trust Series are not deposits with liabilities of Macquarie Bank Limited ABN 46 008 583 542 ( Macquarie ) or any Macquarie Group Company and are subject to investment risk, including possible delays in repayment and loss of income and capital invested. None of Macquarie or any other Macquarie Group company guarantees the performance of the Macquarie Equinox Trust Series, the repayment of capital from the Macquarie Equinox Trust Series or any particular rate of return. Other than Macquarie, any Macquarie Group entity noted on this page is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Cwth). That entity s obligations do not represent deposits or other liabilities of Macquarie. Macquarie does not guarantee or otherwise provide assurance in respect of the obligations of that entity, unless noted otherwise. Past performance is not a reliable indicator of future performance.