Gold - The Anti-Goldilocks: Thoughts From Hedge Fund Woodbine Capital

Previously this morning we laid out some macro thoughts and portfolio adjustments from hedge fund Woodbine Capital. Next we're examining their in-depth thoughts on gold from their October investor letter in an excerpt entitled, "Gold - The Anti-Goldilocks." Woodbine Capital is a global macro hedge fund firm founded in January by Josh Berkowitz and Marcel Kasumovich, two former executives at George Soros' hedge fund firm, Soros Fund Management. In his three years at Soros, Berkowitz returned an annual average of 34% net of fees. They are already closed to new investors as they started with $185 million and now have $2.5 billion in assets under management.

We wanted to present their thoughts on gold today because they offer an intricate and unique perspective on everyone's favorite precious metal. They have owned gold as well as deep out of the money puts on gold. However, they view this position not as a hedge against inflation or deflation, but rather as a part of their theme of stronger emerging market demand.

They argue that, "the fundamental source of strong prices is more likely to be tied to stronger demand from emerging markets, through higher income growth and stronger local exchange rates. We argue there are probably more powerful and much cheaper ways of representing that theme. Of course, another source of higher prices is that all investors wake up with the idea that a small part of their portfolios should be allocated to gold. That's true of any and all assets at any given time - it's called a bubble."

Woodbine then proceeds to examine the three ingredients to a bubble:

1. There is an initial reason for the rise in price. For gold: Weak US dollar, rising investment demand, and ncreased emerging market demand.

2. One-sided exuberance: when both good and bad news is 'good' for the asset and investors don't think the asset will decline. A great example is gold being supported by inflation and deflation cycles.

3. Market prices ignore downside risk. "Perception can be a reality."


So, by all means gold could be argued as a bubble. The hedge fund then goes on to examine gold in-depth by looking at supply and demand, the argument for hedging tail risk, and negative return skews. Instead of summarizing these points, we'll instead present you with the words direct from Woodbine. Embedded below is Woodbine's October investor letter with their commentary, "Gold - The Anti-Goldilocks." RSS & Email readers must come to the Market Folly site in order to read the full letter.




An intricate and well presented look at gold from the folks over at Woodbine Capital. This all comes in the midst of a media frenzy over the precious metal. After all, hedge fund icon John Paulson launched a gold fund and Eric Sprott is launching a physical gold trust. Not to mention, gold hit new highs and then drastically pulled back, causing even more of a frenzy.

All in all though, we've seen a great exchange as various hedge funds present cases both for and against the precious metal as they examine the rationale behind gold's value and its role in a portfolio. For more insight on this commodity, check out hedge fund Sprott's special report on gold, David Einhorn's rationale behind storing physical gold (hedge fund Greenlight Capital), as well as John Paulson's gold thesis. Ah gold... without you, what would we talk about?

Woodbine Capital Sees Possible Early Cycle Slowdown

Yesterday we got word that Paul Tudor Jones' main hedge fund BVI Global had stopped accepting new investments. From the market lows of this year to July, Tudor Investment Corp saw $1.3 billion in inflows and they've decided that they've reached an ideal capacity for now. While Tudor is a well known hedge fund with a storied past, we also want today to focus on another hedge fund that recently stopped accepting money as well.

Woodbine Capital is a hedge fund firm founded by two ex-Soros Fund Management players Josh Berkowitz and Marcel Kasumovich, as well as three other partners. George Soros' former executives launched their new fund in January with only $185 million and they already have $2.5 billion in assets under management. They have reached their initial target AUM and as such have stopped accepting new investments as of November 3rd. As of the end of October they were up 13.07% for the year. They employ a global macro strategy ala Soros Fund Management as they seek to play various trends by trading in all kinds of markets.

We recently got a glimpse as to what themes they will be watching going forward in their October letter to investors. Woodbine has made three main adjustments to their portfolio:

1. "The global housing theme is removed."
2. "Deeper emerging market demand/credit and fiscal consolidation are reduced to marker positions."
3. "Bullish fixed income exposure is raised in our themes of policy cooperation and exit strategies."

They then expand upon their #3 adjustment by saying that, "Regions that were early to exit from very accomodative monetary stimulus are priced for the gradual return to normal interest rates; the long workout in the US will encourage lower global real yields for a longer period and the risk premium in those markets is an opportunity."

Woodbine actually highlights a prudent point that while the global recession has just ended, we are possibly facing an early-cycle slowdown. They attribute this to the fact that the initial surge/recovery was driven largely by fiscal and monetary stimulus. But now that the supporting cast is slowly exiting stage right, inventories are starting to build again and everyone is focusing on demand. Woodbine anticipates that such an early cycle slowdown would put a damper on the potential rise in risk assets. In order to resolve the uncertainty they outline two scenarios:

1. "Global policy response encourages a rebalancing of demand away from the US"

or

2. "The world remains stubbornly tied to US demand, which grows at a very slow pace."

Their portfolio is reflective of such growth uncertainty given that their VaR (Value at Risk) is near the lowest levels since their inception. Overall, interesting thoughts from Berkowitz and Kasumovich's fund. Woodbine also laid out an in-depth look at the most talked about precious metal in a section entitled, Gold : The Anti-Goldilocks, which we've covered this morning in a separate post. For more updates from prominent hedge fund managers, head over to our hedge fund tracking series.