A reader left a question asking about the implosion with Macquarie Infrastructure Trust (NYSE:MIC), which until very recently was close to an across the board holding, and if there are any implications for, as the reader put it, absolute return. I'll expand his thought a little to ask about implications for investment products that either should be in their own world or otherwise be a portfolio diversifier.
If you care about MIC specifically, read the news. Also, reader RW gave a recap in the comments yesterday. Bigger picture MIC, along with other similar products, requires access to the capital markets to buy assets, and it also needs the capital markets to function for it to sell assets. These are transaction oriented businesses often using a lot of leverage.
Another layer of complexity with Macqaurie is that it has many, many funds listed all over the world with a similar structure and so there has been doubt about the parent bank's health. Yet one more layer is that Babcock and Brown (BNB.AX), which has a lot of similarities to Macquarie, has dropped to about zero.
Under all of that, MIC just collapsed.
As far as implications for portfolio diversfiers, a couple of points I've tried to convey are understanding what any of these that you are interested in are vulnerable to and not overloading on things vulnerable to the same risks. MIC is vulnerable to leverage issues and not being able to buy and sell assets. To me that sounds very similar to many of the Canadian trusts (like the hydro funds).
That is a different sort of threat than what is faced by something like Rydex Managed Futures (MUTF:RYMFX), which I own, that faces realistic risks of being long or short something a couple of weeks too long due to its monthly rebalance. More of an outlier risk could be counterparty risk.
Anyone using a single currency as a diversifier faces different risks. There is no way the dollar should have gone up so much in the last few months, but of course it has, and the notion of "no way" doesn't really stand up.
If someone is trying to use VIX derivatives in this way, he or she faces other risks that I couldn't even tell you. As a side note it is pretty clear that very few people really understand VIX. I know almost nothing about VIX but I know that much. Farmland stocks have different risks as a final example.
So integrating any sort of diversifier into a diversified portfolio circles back to proper weighting and understanding how it works in with the rest of the holdings. I wish MIC hadn't imploded, but it did. Owning it was not a big problem, but owning too much of it or owning a bunch of other stuff just like it would have been. This is a perfect example of why I prefer putting only 2-3% in narrow based products (including individual stocks). The consequence for being very wrong is a whole lot less when there's only a couple of hundred basis points on the line.
I hope you can have a great Thanksgiving, enjoy your family, football, a big meal or anything else you might do.