Inflation worry sparks new strategies, share classes |
Date: Friday, January 30, 2009
Author: Alistair Barr, Market Watch.com
Some hedge fund managers and
investors are so concerned about a possible devaluation of major
Western currencies and the threat of inflation that they're taking some
unusual steps to hedge those risks.
Some well-known managers, such as David Einhorn and Seth Klarman, have
shifted investment strategies to protect against inflation.
Other hedge-fund firms are going one step further by offering new
classes of shares denominated in gold and even oil.
Since the financial crisis erupted last year, the Federal Reserve has
slashed interest rates to almost zero and expanded its balance sheet by
more than $1 trillion, effectively pumping lots more money into the
ailing U.S. economy. On Wednesday, the Fed suggested it could start
buying long-term Treasury bonds in another attempt to keep borrowing
costs low.
"The Fed is making loans collateralized by toxic waste and has now
begun a policy called 'quantitative easing' - a fancy term for
'printing money,'" Einhorn, president of Greenlight Capital, wrote in a
Jan. 20 letter to investors. "The currency is being debased."
Greenlight has been buying gold, call options on gold and an
exchange-traded fund that tracks shares of gold mining companies
he added in the letter, a copy of which was posted on hedge fund blogs
Seeking Alpha and Zero Hedge. A spokeswoman for Einhorn declined to
comment.
Greenlight has also moved some of its cash out of U.S. dollars and into
foreign currencies, particularly the Japanese yen, while betting on
higher long-term U.S. interest rates, according to the letter.
Klarman, head of The Baupost Group, told investors in October that the
firm had built a "sizable position in low-cost inflation protection for
the next three to five years."
"The extraordinary and unpaid-for financial market bailout should add
to inflationary pressures over time," he added. "The dollar will likely
weaken over time, perhaps in a hurry, and gold may further strengthen."
Gold shares
For other hedge fund firms, strategy changes aren't enough.
Osmium Capital Management Ltd., a Bermuda-based firm run by former ABN
Amro trader Chris Kuchanny, is launching a new class of shares in its
Special Situations hedge fund that will be denominated in gold.
The Osmium Special Situations Fund already has share classes
denominated in U.S. dollars, euros and British pounds and currently
oversees $178 million.
"Given the challenging market environment, some investors want exposure
to gold, which has historically been a good source of value during
times of economic crisis," Bermuda-based Osmium said in a letter to
clients, a copy of which was obtained by MarketWatch.
"Many investors are already heavily exposed to the major fiat
currencies and wish to diversify into gold, without losing their
ability to invest," Osmium added.
The Special Situations fund, which focuses on arbitrage trading and
events like spin-offs and mergers and acquisitions, has returned more
than 12% a year since it started in March 2005, according to the firm's
letter to clients. It gained 2.8% in 2008, an enviable performance in
light of the heavy losses suffered by many other hedge funds.
When an investor puts money into the new share class, Osmium said it
will buy gold with the cash. The fund will then hedge its exposure to
gold by selling the metal for cash and buying gold forward on a monthly
basis.
That's similar to the way the firm already hedges its exposure to euros
and British pounds when investors put money in those share classes,
Osmium noted.
Investors get the same returns generated by the Special Situations
hedge fund, but these returns will be denominated in troy ounces of
gold, rather than in U.S. dollars, euros or pounds, according to the
firm.
Superfund
At least one other firm also is using this approach: Christian Baha's
Superfund, which runs funds that use computer models to trade futures,
is launching the Superfund Gold LP fund.
This new fund uses the same trading strategies as the firm's other
funds, but the net asset value of the new fund will be in ounces of
gold, rather than dollars or another currency, Superfund explained in a
November filing with the Securities and Exchange Commission.
To make this work, the new fund will buy futures contracts giving it
the right to purchase gold equal to the amount of money raised from
investors. The gold position will be adjusted at the start of each
month to reflect new money coming in and redemptions, along with profit
and losses from Superfund's trading strategy during the previous month.
Oil
While crude oil prices have slumped in the past year, the commodity is
still considered as a useful hedge against possible future inflation.
Reech Alternative Investment Management, run by Christophe Reech, is
launching a new share class of its Volcano Relative Value Fund that
will be denominated in units of "barrels of oil," according to a letter
the firm's broker Newedge sent to investors this week.
The Volcano fund already focuses on arbitrage trading in energy
markets, but the new share class will "allow investors to participate
in the long-term performance of physical oil whilst simultaneously
investing in Volcano," the letter said. 
Alistair Barr is a reporter for MarketWatch in San Francisco.