Gold-Denominated Hedge Funds

For a while now, hedge funds have been creating share classes denominated in gold. By far the biggest fish in this pool is John Paulson, and as a result he’s been buying gold, literally, by the ton. (With gold at $1,050 an ounce, and 29,167 ounces per ton, Paulson’s $4.3 billion gold investment would buy him 140 tons of gold.)

I’m a little unclear on how these share classes work, but it seems similar to a portable-alpha strategy. The problem with gold is that while it fluctuates in value, it doesn’t generate any kind of returns unless and until you sell it. But with these share classes you get to have your cake and eat it: you’re essentially parking your money in gold, while at the same time investing it in obscure and wonderful trading and investment strategies across all manner of other asset classes.

Hillel Aron has a friend who was just at breakfast with John Paulson, being sold on investing in his funds:

His conclusion - not a shocker here - there will be a rush into Gold. Paulson personally has all his own assets in Gold and his funds own 5 different Gold Mining Stocks. By the way, Paulson notes, of the 200 Trillion dollars of investible assets in the world, only 800 Billion of that is Gold.

This means, I think, that Paulson’s own investments in his funds are all in the gold-denominated share classes. And I can see how a multi-billionaire would do something like that: when you have that much money, the only things which can wipe you out are hyperinflation or outright confiscation. Gold is a good way of protecting yourself from both eventualities.

For people with less dynastic amounts of money, however, I’m less keen on the gold-denominated share classes. For one thing, there are substantial hedge-management costs involved. But more to the point, if the price of gold falls, then you can end up in the very painful position where your investment loses money in dollar terms and you still have to pay a large 20% performance fee, since it could still have done well in gold terms. Ouch.

Comments

[S. E. Wells:]

Maybe I don't understand something, and I hate to quibble, but there are 12 troy ounces in a pound so a ton of gold should be equal to 24,000 ounces of gold (12 times 2000 pounds). So, where does the 29,167 ounces per ton figure come from? Is it measured in a different kind of ton or something?

Oct 22 01:40 PM

[Roger Knights:]

He may be talking about metric tons, or tonnes, which are 1000 kilograms. (I think)

Oct 22 03:53 PM

[PeteE:]

I think the gold share class has great merit. If, for example, you invest in Paulson's fund by giving him 1000 oz of gold, your gold investment is then invested in other assetts instead of just sitting in a vault. If the dollar tanks, lets just say in half, even if you are only returned your original 1000 oz gold investment you will have doubled your money and pay zero tax. Rather brilliant.

Oct 31 09:52 AM