Save, make, understand money

Experienced Investor

Hedge funds are investing in gold: do they know something we don’t?

Paloma Kubiak
Written By:
Paloma Kubiak

Hedge funds are often viewed as an indicator of market direction and as they’re now piling investment resources into gold, it’s worth considering what they know that ordinary investors may not.

Hedge funds are investment vehicles designed to make money whatever way the markets fall. Most retail investors fall well outside the hedge fund investment threshold, which can run to millions of pounds.

High net worth individuals entrust their earnings to savvy fund managers who hedge their bets depending on which way they see the market going.

As the name suggests, these funds are supposed to hedge their risk thereby limiting it, but they can often be riskier than the investment options, like mutual funds, that are accessible to most retail investors.

Hedge funds often use leverage or borrowed money to amplify their returns, but this also amplifies risk, and some of the more spectacular investment disasters of the past two decades have been collapsed hedge funds.

But the losses, and lessons, of the financial crisis are still front of mind, and these days hedge funds recognise the need to hold physical gold as part of a balanced portfolio to hedge against the uncertainties of the future.

Geopolitical uncertainties

Holding gold is their protection against unexpected market shocks, maintaining, or increasing value when their leveraged or high risk trading strategies are disrupted. And the risks and uncertainties in the geopolitical economy today has prompted a flurry of hedge funds to invest in more gold now than we have seen in decades.

During 2018 we have seen a 39% increase in hedge fund professionals purchasing physical gold (privately and outside their hedge fund role) compared to 2017 citing concerns over systemic geopolitical risks.

Global geopolitics and financial interdependency means there will always be an element of uncertainty in the world. However, news of potential trade wars, the threat of a physical war, volatile political personalities and a global financial system balancing on an exorbitant debt-pile are making those risks far more patent.

Hedge funds aren’t usually highly vocal about their strategies to anyone other than their investors, and most hedge funds don’t explicitly say they are buying gold, but their actions are reflected in gold trades at the main international exchanges, and the signs point to a rise.

Some fund managers are more vocal than others. Ray Dalio, manager of the world’s largest hedge fund, Bridgewater Associates, last year recommended buying gold as a hedge against increasing global risks.

Hedge funds act on the same information that is available to everyone, but they watch for signs of risk with more acuity than the average man on the street. What they will be seeing now is a level of government debt in western economies that has never been seen before.

After borrowing to claw their way out of a recession, US and European debt mountains will not be easy to shrink. Former chairman of the Bank of England Mervyn King has warned that the sheer size of private and public sector debt across the world could trigger another financial meltdown.

Brexit and recession

Added to the debt pile, Brexit remains a substantial unknown. Despite the exit deadline looming, key economic and trade decisions remain unresolved, so the actual lasting effects of the UK’s exit from the European Union is a significant risk.

Meanwhile some researchers believe Germany may be teetering on the brink of a recession, which would be disastrous for the European countries that rely on its financial backbone when crises hit.

There remains the possibility of an equity correction, with stocks at record highs, and more worryingly for people whose main investment is their home, a property correction is also a concern.

If rates increase to pre-crisis levels, millions of people who have never seen a rate rise in their adult life won’t be able to maintain mortgage payments. We’ve already seen signs of a slowing retail market, which affects employment figures and retirees with pensions in companies that collapse.

These concerns hit close to home for many of The Pure Gold Company’s customers, who would be directly affected by any market or property slump, and have concerns about their pension investments in an uncertain future.

As such The Pure Gold Company has seen a 167% increase in people investing in physical gold this year compared to 2017 on account of the above mentioned risks.

All this information is in the public domain, so hedge funds don’t necessarily know any more than we could do with a little research. But they are being proactive about their portfolio of assets, and they seem to be acting with more urgency than many. Perhaps they have a clearer sense of timing.

Should we follow their lead? After all, some hedge funds went bust and others only just made it out the other side of the financial crisis, so why should we trust their instincts this time? Maybe for just that reason. Yes, hedge funds like to take risks to increase the potential reward, but they also like to mitigate this risk, otherwise they could become another victim of unexpected financial shocks.

Many of The Pure Gold Company’s clients are financial professionals and investment bankers, already steeped in market information, who follow the lead of successful hedge fund managers.

There might just be something in it.

Joshua Saul is CEO of The Pure Gold Company