Gold Drop Is Blow to Prominent Hedge-Fund Manager Sprott

Date: Thursday, December 12, 2013
Author: Rob Copeland, The Wall Street Journal

One of the world's biggest gold bugs is getting crushed by the metal's steep fall.

The flagship fund of prominent Canadian hedge-fund manager Eric Sprott SII.T -3.08% has dropped more than 50% this year in what will likely be the third consecutive year of double-digit percentage losses, according to documents sent to investors.

Eric Sprott says government data understate precious-metals demand. Bloomberg News

 

Redemptions and weak performance have pushed down hedge-fund assets managed by Mr. Sprott to about $350 million from nearly $3 billion in 2008.

The declines are largely due to the conviction of Mr. Sprott—for the most part unshaken—that gold and other precious metals will rise in the long term.

Gold has dropped 25% over the past year and is on track for its first annual decline after 12 years of gains. It settled Wednesday at $1,257 a troy ounce. Silver, another favorite of Mr. Sprott's, is down 33% and settled Wednesday at $20.36 an ounce.

The poor results come with a personal cost: Mr. Sprott's investment company, Sprott Inc., which he founded in 1981, said last month that it is phasing him out of investment decisions.

By the end of next year, Mr. Sprott—who early in his career was a programmer for Merrill Lynch—will no longer directly make the firm's investment decisions, though he will remain chairman.

Sprott Chief Executive Officer Peter Grosskopf said that Mr. Sprott would also be handling "chief cheerleader duties."

Already last year, the firm added co-chief investment officers to all of Mr. Sprott's funds, including a Canadian equity mutual fund that lost 40% during the past year.

"Nobody here likes me to use that word 'turnaround' but let's face it: That's what we're doing," Mr. Grosskopf said.

The company declined to make Mr. Sprott, 69 years old, available for comment.

The firm's focus will remain precious metals, but it aims to better manage its risk, Mr. Grosskopf said.

Sprott's mutual-fund, private-equity and wealth-management arms now collectively manage about $7 billion, down from $10 billion last fall. The vast majority of that decline was from redemptions and position markdowns in the funds and physical-gold trusts.

Many precious-metal bulls have been hurt this year as low inflation and rising financial markets reduced demand for havens. Few have been as concentrated in gold as Mr. Sprott or touted it with such zeal.

In interviews and other commentaries, Mr. Sprott, who is somewhat active in libertarian causes, has said that he believes government statistics understate demand from emerging markets and obfuscate true levels of supply.

Mr. Grosskopf said the firm's investors were fully aware of Mr. Sprott's thinking. "We have always been transparent about what we're doing and what we expect the results to be," Mr. Grosskopf said. "Everybody knew what the risks were."

The HFRX Macro: Commodity-Metals Index, which tracks hedge-fund managers with at least 50% exposure to metals, is down 28% so far this year.

Mr. Sprott's losses exceed that and other precious-metals benchmarks, thanks in part to heavy exposure to volatile mining stocks and short exposure to international equities that have climbed this year, investor documents indicate.

Among high-profile peers, only John Paulson's PFR Gold fund, down 63% for the year through the end of October, according to an investor update, has come close to Sprott's losses on a percentage basis. Mr. Paulson's losses, however, are much smaller in dollar terms.

Other big investors who were previously bullish on gold have been exiting. Daniel Loeb's Third Point LLC sold out of its long-held gold position in the second quarter, he told investors in a letter. As a whole, hedge funds are the least bullish on gold since 2007 and the most negative on silver since data began being collected in 2006, the Commodity Futures Trading Commission said this week.

Unlike Mr. Paulson and many other hedge-fund managers, Mr. Sprott also has a public company to worry about. Shares of Sprott Inc. are down 38% this year on the Toronto Stock Exchange and closed Wednesday at C$2.52. Mr. Sprott's personal one-third stake has shed more than $100 million in value in 2013.

About half of the money left in the firm's main hedge funds comes from Mr. Sprott and his employees, a spokesman said.

CIBC World Markets analyst Paul Holden rates the company a sector underperformer. "Their reputation has really been based on the precious-metals front, and it's a difficult transition," Mr. Holden said.

Some of Sprott's earliest investors may still be in the black. Since its start, the flagship hedge fund has an annualized 5.8% return. The firm protected itself in the hedge-fund swoon of 2008 with short bets against financial firms, losing only 4.4%, and for 2010 reported its best year ever, rising 41.2% as precious metals shot up.

That proved to be the fund's high water mark. An investor who met with the fund that year said Sprott was increasingly bearish on the global economy and continued to short global financial stocks, a leftover tactic from the crisis. In interviews, Mr. Sprott said he expected silver to hit $100 an ounce. Silver never reached even half that mark.

Yet, as of his latest investor letter, Mr. Sprott was still flagging potential sparks for precious metals, like a new Federal Reserve chairman and European elections. His firm continues to try new ways to repackage its trademark. In September, it started trading a new hedge fund for Chinese investors in a joint venture with Zijin Mining Group Ltd. 601899.SH -0.41% Its main investment focus: gold.