Hedge veteran eyes commodity play in forex crisis

Date: Friday, June 18, 2010
Author: Reuters

Veteran hedge fund manager Bill Browder is buying commodities and the companies that produce them in emerging markets to profit from what he said is a looming crisis in the world's major currencies.

He believes that burgeoning debt and budget deficits in Europe and the United States will lead to the debasement of these currencies, shifting economic power to the better-positioned emerging economies.

"The enormous debt burdens and deficits are the elephants in the room. Emerging markets generally don't have them," he said, speaking to Reuters at the GAIM International hedge fund conference here.

He said governments had few available options to deal with these problems, since raising taxes or cutting expenditure were politically risky and borrowing money would only worsen the long-term problem.

"Printing money is the easiest way, but everyone is debased. There will be a decline in the value of paper currency against real assets," Browder said.

He said his Hermitage Global fund, which manages $1 billion for foundations and wealthy families, was buying shares in the cheapest companies producing hard assets and would take direct exposure to gold via exchange traded funds and mining companies.

One of his picks is Sesa Goa (SESA.BO), an Indian iron ore producer trading at a discount to other producers.

"It's one of the closest producers to China, the world's biggest consumer, and it's closer to that market than Brazil, less expensive in terms of transport costs than Australia and has a lower cost structure," said Browder.

One short-term problem with the strategy was that some major governments could have what he called "moments of lucid responsibility" when they try to cut their deficits to defend their balance sheets.

However, Browder said if developed markets made serious attempts to curb their debt and budget deficits, the result could be the sort of political unrest already seen in countries that have initiated austerity programmes.

Browder's asset management company Hermitage Capital once managed the largest hedge fund in Russia prior to Browder being denied entry to the country in 2005 in a long-running confrontation with the authorities which saw the firm's lawyer die while in jail in November last year.

Browder has given up investing in Russia, which he has described as a "criminal state", but the experience has not crushed his enthusiasm for other emerging markets, even if there are limits to where he will invest.

"I can deal with a certain amount of corruption, it offers opportunities if you can get countries to make some changes. But without a well-rehearsed and clearly developed rule of law, valuations have to be sufficiently low (to be attractive)."