Hedge Funds Weather August Financial Market Rout Trading Gold at a Record

Hedge funds run by Orix Investment Corp., Superfund and Four Elements Capital Management Pte benefited from the surge in gold last month, weathering the U.S. sovereign downgrade and Europe’s deepening debt crisis.

The Orix Commodities Fund, which uses computer programs to search for price signals in futures markets, gained 3.5 percent in August, while Superfund Blue Gold, which invests in global equities and tracks the bullion price, jumped 13.45 percent, the firms said. Gold investments in the Earth Element Fund, run by former commodity traders at BNP Paribas (BNP) and JPMorgan Chase & Co. (JPM), returned 1 percent, helping trim losses in the fund.

Gold surpassed $1,900 an ounce for the first time in August as investors sought protection for their wealth on concerns that global economic growth is slowing. The Eurekahedge Hedge Fund Index lost 1.9 percent in August and the MSCI World Index slid 7.3 percent, their worst month since May 2010.

“Gold has become a very volatile asset class so if you’re good at trading through the volatility you can profit from it,” said Peter Douglas, principal of Singapore-based GFIA Pte, which advises investors seeking to allocate money to hedge funds and runs a wealth-management business.

Gold Hedge

Bullion is up 32 percent this year, outperforming global stocks, commodities and Treasuries as investors seek to diversify away from equities and some currencies, and central banks add to their reserves for the first time in a generation. Holdings in exchange-traded products reached a record 2,216.756 tons on Aug. 8.

Gold is in the 11th year of a bull market, the longest winning streak since at least 1920 and reached a record $1,921.15 an ounce on Sept. 6. After reaching $1,913.50 an ounce on Aug. 23, it suffered its biggest drop since February 2010.

The metal fell for a second day as concern about a potential Greek default drove the dollar higher and some investors sold the metal to cover losses in other markets on speculation the European debt contagion is worsening. It recently traded at $1,841.80.

Continuing to be overweight gold, or holding more bullion relative to benchmarks, to boost performance might not be prudent, said Satoko Koshida, founding partner of KTOs Capital Partners Co., a Tokyo-based hedge fund.

“Betting on gold only just because the mandate allows you to do so may be too risky,” Koshida said. “If you are looking for a mid-to-long-term gain, you should be diversifying your assets; after all, gold is just one of many asset classes.”

‘Thanks to Gold’

The $48 million Orix Commodity Fund held long positions in bonds and gold, while shorting equity futures, said Atsuhito Mori, Orix Investment’s chief trader in Tokyo. The fund, also run by GCI Asset Management Inc., has returned 11.2 percent since its inception in June 2010, said Shinichiro Nagai, a senior manager at the investment group of Tokyo-based GCI, a Japanese hedge-fund firm.

“August performance by far was thanks to gold’s gain,” Mori said. “People used to think that $400 was the ceiling for gold and some argue that the current price doesn’t reflect the fundamentals or the supply and demand conditions, but if this continues, it could well become the new fundamental for gold.”

Superfund, which oversees $1.4 billion in assets, has been betting on gold since the firm founded in Vienna in 1995 started offering funds that track the price of bullion in 2005, said Johann Peter Santer, president of Superfund Securities Japan Co.

‘Not Surprised’

Superfund Blue Gold, which uses a computer-driven model to trade global equities, offers a gold class by investing in metal futures to take advantage of movements in bullion, according to the firm. The gold class combines the performance of equities in the fund and the price of gold, Tokyo-based Santer said.

“We’re not surprised that this is happening,” he said. “We started educating on gold when it was about $370 per ounce. Back then, people thought these Austrian guys were crazy.”

The gold price may reach $3,000 an ounce in the next one to two years, Santer said, adding that it will depend on how much money will be printed globally. He cited buying by central banks, demand from India and China, introduction of ETFs, and gold becoming the “de facto for safe haven investments” as reasons for further gains.

Central bank and government institutions buying of bullion rose almost fivefold to 69.4 tons in the second quarter, taking the first-half total to 192.3 tons, according to the World Gold Council. In 2010, central banks became net buyers for the first time in two decades and will remain net buyers this year, it said.

The Earth Element Fund lost 0.29 percent in August, according to Managing Director Lionel Semonin at Singapore-based Four Elements Capital, with $23 million in assets.

Offsetting Metals, Oil

Gold holdings in the fund, which invests in about 40 commodities products around the world including metals, agriculture and energy, helped limit losses it made on base metals and energy, Semonin said. Aluminum dropped 5.9 percent in August, while crude oil slid 7.2 percent.

The firm’s computerized analysis picked gold to invest at the end of July and cut its position in August, Semonin said. Earth Element is up 3.07 percent this year through August, compared with the 1.3 percent decline by the Eurekahedge Global CTA/Managed Futures Index.

Investments in precious metals yielded 1.66 percent in August for U.K.-based Quality Capital Management Ltd., which manages about $880 million in managed futures funds, said Founder Aref Karim. Of those gains, gold made up 1.63 percent last month, while the sell-off in aluminum and copper markets led to a loss of 3.26 percent for the fund, he said.

Astmax

Astmax Co., a Tokyo-based asset management firm, which focuses on commodities, is planning to start a hedge fund later this year that will invest in global markets including the New York Mercantile Exchange and Chicago Board of Trade based on computerized trades, said Tetsu Emori, fund manager at the Tokyo-based firm.

The fund returned 18 percent in the past year based on simulated trades and 5 percent last month as gains in metal prices including gold and silver contributed, Emori said.

“Long positions in flight-to-quality assets, mainly fixed income, have again showed their ability to hedge out uncertainty,” Quality Capital’s Karim said. “Gold has been a store of value for centuries. Its price reflects global anxiety, political and economic uncertainty, and even long-term implications of climate change.”

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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