Hedge funds offer to price in gold

Date: Thursday, January 29, 2009
Author: James Mackintosh and Javier Blas, Financial Times

A hedge fund has begun offering investors the chance to have their investment denominated in gold, as worries grow over governments debasing their currencies by printing money.

Osmium Capital Management, a $178m hedge fund manager based in Bermuda, is launching a new share class allowing investors to hold shares measured as troy ounces of the fund, rather than US dollars, sterling or euros.

The move follows a surge in investor demand for small gold bars and coins held by individuals and gold-backed exchange-traded funds that are holding a record amount of bullion.

This week London spot gold prices hit a 3˝-month high above $900 an ounce and set all-time highs in sterling and euro terms as investors rushed into the metal. Gold on Wednesday traded at $886.75 an ounce.

Chris Kuchanny, Osmium chief executive and a former London ABN Amro trader, said he was putting almost all his personal wealth into the new share class: “Investors have voiced concerns that they’re overly exposed to the major fiat [paper] currencies in an environment where the fundamentals of those currencies are clearly deteriorating with governments assuming more debt and having lower revenue and more expenditure.”

The gold share class will be hedged into the fund, just as the sterling and euro classes are. So a 10 per cent rise in the fund should turn 100 ounces of the share class into 110, minus hedging costs estimated at 0.1-0.2 per cent a year.

Several other hedge fund managers have voiced concerns about the impact of the printing of money and have begun investing in gold but no other funds are thought to have gold-denominated shares.

David North, head of asset allocation at Legal & General Investment Management, the UK’s biggest institutional investor, said the $500m offshore and onshore hedge funds he runs had a third of their value-at-risk in gold. “Inevitably low interest rates lead to a gold bubble,” he said, pointing out that the major cost of owning gold was the income that could have been earned from investing elsewhere.

London’s RAB Capital has a $30m hedge fund which aims to provide the return on gold plus extra from gold-related trading strategies, but its shares are denominated in traditional currencies.