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Nov. 23, 2009, 11:33 a.m. EST
Are new hedge fund gold bugs getting in at the top?
A four-fold surge this decade may not provide the best entry point
By Alistair Barr, MarketWatch
SAN FRANCISCO (MarketWatch) -- Top hedge fund managers including Paul Tudor Jones and David Einhorn have built big gold positions this year on concern about inflation. But what if the price of the precious metal already reflects this worrying outlook?
Gold prices have surged roughly four-fold this decade. On Monday, the most active New York gold contract charted a new high of $1,174 an ounce. Read more on daily gold prices. "Anytime you're getting into an investment after it's already up four times from its low point, that's not exactly great market timing," said Ed Yardeni, president of Yardeni Research. "All contrary indicators suggest that now is not the time to buy gold."
SPECIAL REPORT: THE NEW GOLD BUGS
Now or never
Gold has long been favored by a fringe of the investment world, but this year some of the world’s leading hedge fund managers have loaded up on the precious metal. Why gold and why now?
• Are the new gold bugs getting in at the top?
More in this special report:
• How to buy gold, gold ETFs
• Gold fears hinge on unfettered Fed, spending
• Brimelow: Original gold bugs are cautious
• What's driving gold higher?
Commodities: See the full special report
Gold bugs have been attracted by the solidity and portability of the metal versus paper currencies for decades. It's gained more admirers from the $1.5 trillion hedge fund industry this year as policymakers unleashed trillions of dollars in monetary and fiscal stimuli to avert another Great Depression. Read about the New Gold Bugs.
However, some hedge fund managers are avoiding gold and, if they're concerned about future inflation, are opting for other ways to protect against that.
"I'm not a gold fan," Bill Ackman, head of hedge fund firm Pershing Square Capital Management, said during a speech last month at the Value Investing Congress in New York.
The metal is a "greater fool" type investment, he added.
"You have to go to a lot of investment conferences like this to persuade other people to buy it," Ackman said. "I'd much rather own something with a stream of money coming in."
Pershing bought McDonalds Corp. (NYSE:MCD) shares in recent months, partly because it's a good hedge against a falling U.S. dollar and offers some protection against inflation, Ackman added.
He also recommended Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) and Automatic Data Processing (NASDAQ:ADP) as companies that should do well if inflation takes off.
Third Point, a hedge fund firm run by Dan Loeb, held 900,000 shares of the SDPR Gold Trust exchange-traded fund (NYSE:GLD) worth almost $80 million at the end of 2008. By March 31 this year, the position had shrunk to 50,000 shares and at the end of June, Third Point had exited the trade, according to regulatory filings. Read about gold ETFs.
Style drift
Hedge fund investors may get twitchy if managers stray from their area of expertise to get into gold.
In other strategies, if managers have a sufficiently intelligent thesis, a gold trade can also make sense. But if a hedge fund focused on corporate events bets on gold as a macro-economic strategy, Weinstein said he would consider that style drift, a big no-no in the hedge fund business.
Crowded trade
One hedge fund investor said almost every manager they speak to has invested in gold in some way recently. This is one of two macro-economic trades that are popular in the industry, the other being shorting, or betting against, the U.S. dollar, the investor explained on condition of anonymity.During the first half of 2008, a common hedge fund trade was to short financial stocks and go long commodities-related shares.
But the financial crisis and a ban on short-selling financial stocks triggered record redemptions from hedge funds later in the year. Many commodities-related stocks slumped as managers were forced to unwind positions to return cash to investors.
Read about the impact of forced hedge fund selling last year.
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