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S T O C K S P O T L I G H T: H E D G E S

Signs of the Times


How most money managers hedge their bets is generally not easy to track, but two hedges against bad things
happening in the broader economy were very clear from the buying activity of SuperInvestors last quarter.
Hedge fund managers, as befits their
name, often employ a wide variety of
hedges against broader macroeconomic
factors impacting their individual investments. A long position in a specific oilcompany stock, for example, might be
offset by a short position in the underlying commodity. The goal is to reduce the
impact of macroeconomic factors on the
portfolio and shift risk to how well specific investments have been chosen.
Many of these macro bets aren't transparent to outsiders, but two of the most
widely bought share positions by
SuperInvestors last quarter appear to be
just such broad-based wagers, using publicly traded ETFs. The first, SPDR Gold
Trust [GLD], invests directly in gold bullion, with each of its shares representing
roughly one-tenth of an ounce of gold at
current market prices. The second,
ProShares UltraShort 20+ Year Treasury
[TBT], is a bit more complicated, but is
constructed so that the returns on its
shares deliver twice the inverse of the performance of a Barclays Capital long-term
U.S. Treasury bond index. Its effectively a
leveraged bet that Treasury yields will rise.
Investing in gold is an oft-debated strategy among money managers. Equity
strategist James Montier summarized his
take on the debate in an interview last year
in Value Investor Insight (October 31,
2008): Gold kind of scares me because
very often the people involved with it seem
to be slightly insane. My other problem is
I don't know how to value it. Unlike an
equity that supposedly has cash flow
attached to it, or unlike a bond that has a
coupon, gold isn't worth anything intrinsically beyond what somebody is willing to
pay for it. That said, I certainly see why
gold could be considered somewhat of an
insurance policy, if not an investment in its
own right. Any systemic economic turmoil
is likely to drive gold prices higher.
David Einhorn of Greenlight Capital,
February 27, 2009

whose largest reported position at the end


of 2008 was in SPDR Gold Trust, elaborated on the gold-as-insurance-policy
argument in comments before an investment conference earlier this month in
New York. As government authorities go
all in to try to mitigate the near-term
effects of economic collapse with aggressive monetary and fiscal policies, he said,
the risks of inflation and of the depreciation of the U.S. dollar have increased substantially. Were such risks to come to
pass, gold would likely perform very well.
Our instinct is that gold will do well
either way: deflation will lead to further
steps to debase the currency, while inflation's effect speaks for itself, he said.
While star investors' interest in gold is
not likely a short-term trade, the trade so

far appears to have been a good one.


SPDR Gold Trust shares are up 40%
from their 2008 low of $66 in November.
The interest in the ProShares ETF has
similar elements to the wager on gold.
Inflation, a declining dollar and the
strained balance sheet of the U.S. government is no recipe for robust Treasury
bond prices, especially from their current
high levels. Even if Armageddon is avoided, the outlook for Treasuries might be
suspect, as Baupost Group's Seth
Klarman pointed out in his most recent
investor letter: When economic recovery is anticipated, when investors decide
to take a bit more risk, safe government bonds will fall significantly in price
and frightened investors who overpaid
for safety will be tallying their losses. SII

INVESTMENT SNAPSHOT

Hedging Their Bets


Unusual times warrant unusual measures: Two popular bets last quarter by SuperInvestors
using ETFs, one long the price of gold and the other short Treasury bond prices, could pay
off handsomely under a variety of future economic scenarios most of them bad.
SPDR Gold Trust

ProShares UltraShort 20+ Year Treasury

(NYSE: GLD)

(NYSE: TBT)

Share Information

Share Information

(@ 2/26/09):

(@ 2/26/09):

Price

93.06

52-Week Range
Net Assets

Price

66.00 100.44
$24.93 billion

100

47.62

52-Week Range
Net Assets

35.51 75.00
$2.94 billion

80
70
60

80

50
40
30

60

20
10
40

2008

www.superinvestorinsight.com

2009

2008

2009

SuperInvestor Insight 8