With traditional assets in the doldrums, wealthy and institutional investors are turning to an ever wider range of ‘alternative alternative’ investments, with platinum and palladium now th
With traditional assets in the doldrums, wealthy and institutional investors are turning to an ever wider range of ‘alternative alternative’ investments, with platinum and palladium now the latest stars of the commodities and precious metals boom, while Meissen ceramic figures are soaring in price at auction. No wonder hedge funds and their investors are being blamed – quite possibly unfairly – for the speculation supposedly driving energy and food prices.
Platinum enthuses investors in exchange-traded products
Platinum has emerged as the most popular commodity in 2008, with platinum and palladium exchange-traded commodities approaching the USD1bn mark for investment this year.
The prices of both metals have been benefiting from investor demand for commodities and assets that are uncorrelated to equities. As a result, precious metal ETC assets have grown by more than 1,000 per cent in the past 12 months, reaching a total of USD2.2bn.
ETF Securities has seen demand for platinum and palladium ETCs rise sharply, bringing total ounces under management to USD880m, and the firm expects the total to reach USD1bn in the near future. In addition, investment bank UBS is also poised to launch two exchange-traded notes offering long and short exposure to platinum.
Unlike exchange-traded funds, ETNs do not purchase physical platinum to back the number of shares sold, but offer another channel that gives investors exposure to this fundamentally strong market.
Says Nik Bienkowski, chief operating officer of ETF Securities: ‘Substantial interest has come from investors who have sought safe havens from the continued uncertainty facing most traditional asset classes. Investors have also been moving into precious metals as a hedge against rising inflation and potential further weakening of the US dollar.’
With growing demand for commodities and the hedging quality that they offer, hedge funds are keen to find out what the next big thing will be.
The blame game
With oil prices fast approaching USD130 a barrel and a global food crisis looming, the US Senate Committee on Homeland Security and Governmental Affairs is scrutinising the role of financial speculators in the commodities markets.
This week senators have been listening to testimony on how speculative investment by hedge fund managers and others may be contributing to food and energy price inflation.
Hedge fund manager Michael Masters, of Atlanta-based Masters Capital Management, argues that commodities prices are being driven up by institutional investors, including pension funds, sovereign wealth funds and university endowments, which are investing in commodity futures based on indices as a hedge against inflation.
Once again, hedge funds have been dragged in as an explanation for why certain prices are behaving abnormally. The fact is that speculators have always existed in the commodities trade, and investment from hedge funds – speculative or otherwise – is nothing new.
Could it not be that other factors are fuelling the boom in commodity prices, such as the weak dollar or increased demand of commodities from fast-growing emerging economies such as China or India? Not according to Masters, who told the senators: ‘The increase in demand from index speculators is almost equal to the increase in demand from China’ over the past five years.
Whether this is true or not, hedge funds can often be a convenient target even when the facts speak differently. An expert in commodities trading for a large investment bank claimed recently: ‘It’s not hedge fund money but the pension funds that have been investing in commodities for the past two to three years to diversify their portfolios.’
There is no doubt that the recent rise in commodities prices has been accompanied by a growing interest from institutional investors. But are hedge funds to blame for rising oil prices? So far the evidence looks fairly thin.
Meissen auction illustrates expansion of alternative investment universe
When jittery stock markets and uncertainty get in the way of traditional investment, alternatives are considered a viable investment option, with hedge funds perhaps being the most visible exponents of this form of investment. Now it seems that other, more esoteric alternative investments – such as Meissen ceramic figures – are garnering higher returns than usual.
That is why a number of sellers who placed items for sale in Bonhams’ Fine European Ceramics auction on May 14 were astonished by the prices achieved as Meissen items far outperformed their pre-sale estimates. A figure of Columbine circa 1744-47 estimated at GBP7,000 made GBP18,000; a figure of the Dancing Harlequin estimated at GBP4,500 made GBP16,200; a rare Meissen farmhouse circa 1750 estimated at GBP6,000 sold for GBP16,200.
‘There was strong bidding in the room and a record number of telephone bidders from Europe and the US,’ says Nette Megens, a specialist in European ceramics at Bonhams. ‘This is a market that is not affected by the financial markets – it is stockmarket-proof. We have seen this in the past and it is proving just as true today. Fine Meissen must be one of the best hedges against financial meltdown. It’s a great alternative investment.’
Floundering equity markets combined with scepticism about the valuation of bonds prompted increasing attention to alternative investment. When international investors who are willing to pay almost double the expected vale for ceramic figures, it’s clear that the boundaries of alternatives are continuing to expand.
Paulson-Icahn siege will influence Microsoft’s Yahoo! bid
Paulson & Co, the New York-based hedge fund manager that quadrupled its assets to USD30bn last year by betting on the collapse of the US sub-prime mortgage market, has bought 50 million Yahoo! shares during the first quarter.
Paulson has thrown its weight behind the plans of investor Carl Icahn to challenge the Yahoo! board by putting forward an alternative slate of directors at the company’s upcoming annual shareholders’ meeting. Last Thursday, Icahn launched a proxy battle to force Yahoo! to reopen talks with Microsoft, saying the board had acted ‘irrationally’ in refusing the software giant’s USD47.5bn acquisition bid.
When a hedge fund manager joins a battle like this, it is usually for a better return. So while Paulson has said it hopes a proxy fight won’t be necessary to get Yahoo! and Microsoft back to the bargaining table, clearly it will do what it takes to generate a return on its investment.
Paulson, which is managed by merger arbitrage specialist John Paulson, disclosed in a regulatory filing it had built up a stake of about 3.4 per cent of Yahoo! with a value of USD1.44bn. Icahn holds 59 million shares, or 4.3 per cent of the company.
Hedge funds tend to pursue returns more aggressively than other institutional shareholders and are also more likely to vocally press for tactical moves that could buoy target companies’ share price. Yahoo! shareholders stand to gain by Paulson’s intervention, and it seems now a matter of when rather than if the Microsoft deal gets back on track.
