Simple Minds, Sleeping Tight
By Adrian Ash
November 15, 2007
Do you need to chase 25%
gains a year from gold to get a good night's sleep?
WHY DO SOMETHING SIMPLE when you can do
something complex instead?
Choose the complex route, and you'll get to charge
investors 1.5% per year for the pleasure of over-complicating
their risks as well as their potential gains...plus one-fifth of
any profits they make on top!
"We believe that gold and silver is the
cheapest asset class at the moment and that the cost of
production has put a floor under the price," says Mark
Mahaffey, a former director of Bank of America and now chief
financial officer of Hinde Capital Ltd, a new London-based
precious metals fund.
"We are at a monetary juncture so it is not
only advisable to invest in gold – it is a must," he
adds. Hence his urgency in setting up the new Hinde Gold Fund in
record-quick time.
Registered in the Virgin Islands, this gold-based
hedge fund took less than three months to gain approval from the
UK's investment regulators, the Financial Services Authority.
And charging 1.5% per year – plus 20% of the gains made by
those clients choosing to make the minimum $100,000 investment
– the Hinde Gold Fund is certainly less expensive than many
other hedge funds.
Launched with $5 million of the management's own
money at stake, it only requires one month's notice on
withdrawals, and there is no "lock-up" period to keep
new investors tied in, either.
What's more, Hinde is working on what's known in
the industry as the "high water mark" principle. Every
time the fund's value reaches a new high, its investors will
only pay the 20% performance fee on gains made above and beyond
that level. If the fund slips back, the managers are going to
make do with their 1.5% annual charge alone.
So far, so fantastic for high-net worth investors!
But besides buying gold on behalf of Hinde's clients, what will
the fund achieve that...well...that Buying
Gold alone would not?
"The startup will also use 'plain vanilla'
derivative strategy to enhance performance," according to
HedgeFund.net...
"The fund employs a macro environment analysis
[plus] a fundamental and model approach," chips in
FINalternatives...
A final technical and sentiment model will
"further refine allocations and entry and exit points for
each trade," adds a brokerage document released to
journalists.
The rocket science of what we here at BullionVault
call "quantum finance", in other words, will enable
the fund to offer "smoothed-out volatility in the gold
sector," claims the fund's other manager, Ben Davies.
Formerly head of trading at RBC Greenwich Capital, and now chief
executive of Hinde, he says he wants "to give people the
opportunity to invest but sleep well at night.
"We will invest in bullion but also in
equities and the derivatives [because] what people need is a
structured and well managed way to re-allocate into gold."
But is a "structured" product really what
investors now stepping into the Gold
Market need?
Sleeping well at night, as far as Hinde are
concerned, means an annual performance target of 20-25% total
returns.
Anyone simple-minded enough to just Buy
Gold and hold it, on the other hand, made average gains of
nearly 13.5% per year (before costs) between New Year's Eve 1999
and the start of 2007. They've also suffered volatility twice as
great as that delivered by the S&P index on a weekly basis,
too.
So Hinde hope to pretty much double the average
return on Gold
Bullion Investing seen so far in this bull market, whilst
also cutting out the short-term dips.
How? As Davies told Global Money Management
magazine at the start of November, the plan is to go long of
those gold-related assets they think are about to go up...and to
sell gold-related assets short – including gold bullion itself
and mining stocks – when they look set to take a bath.
Either that, or Hinde are secretly hoping gold will
just keep repeating the gains seen in 2007 to date...now pushing
25% for anyone buying with US Dollars on the first trading day
of January.
Holding the S&P index, by contrast, would have
returned less than 2.0% annually since the start of 2000. So far
in 2007 it's delivered 3.5%, even after reaching new all-time
highs in the summer. And again, these figures – which exclude
dividends, of course, just like most index trackers – also
come before costs, now slashed to just 0.07% per year if you put
$100,000 or more into Fidelity's FSMKX tracker. (Compare that to
the annual management fees of 1% plus regularly charged by
mutual-fund index trackers as the Dot Com Dump turned into a
crash!)
Glancing at the outlook for the S&P vs. gold
here at BullionVault,
we can't fault the logic behind Hinde's press-friendly launch.
"We are all waking up to the idea that the government has
been able to erode the purchasing value of currencies," as
Ben Davies pointed out to Hedge World at the end of
last month.
"Our premise on the macro side is that it
wasn't until 2003 that exploration in the mining industry got
kick-started" – so any meaningful growth in mining output
will take until 2014 to come online.
New gold deposits also tend to sit in unstable or
inhospitable parts of the world. Gold mines in established
fields, meantime, have to be dug deeper, all the way down to 4
kilometers and more in South Africa. And all the while, growing
pressure from the environmental lobby is adding to costs, hassle
and over-runs.
In short, gold's looking good from here – not
least because everything else is starting to smell so bad! But
where we have to part company with Hinde's views, however, is
how private investors might best take advantage of whatever
gains in gold are yet to come.
Simply Buying
Gold – that simplest of assets...a mere lump of metal
that's becoming increasingly valuable as investors walk away
from securitized and structured products – has delivered a
series of strong, solid annual gains so far in this bull market.
"Past performance is no guide to the
future," of course, as Hinde's regulators in London like to
remind investors as if they're scolding a child. But if you cut
your Gold
Dealing costs to a minimum – and you pay wholesale rates
for secure storage, with insurance included, so you don't have
to put up with the hassle of taking gold into your physical
possession – then the performance of gold is all you will need
worry about.
The chances of, say, a well-paid hedge fund manager
mistaking a big move in gold...going short when it's about to
surge, or even gearing up with call options just before it takes
a dip...won't need to keep you awake at night.
Gold offers an antidote to the complexity and
leverage now causing havoc in the world's money markets. Joining
its bull market now should be as simple as Buying
Gold outright, and holding to see what happens next.