WEST PALM BEACH, FL (HEDGECO.NET) – There was a cresting wave of investment in hedge funds as gold futures surged past $600 last week on fears of inflation, while silver hit a 23-year high Monday, the highest level reached since November 1980. Gold is often seen as a hedge against inflation. Hedge funds posted a strong first quarter, thanks to the continued boom in energy and hefty gains in the metals markets.

Hedge funds are private investment pools more volatile in nature than run of the mill stock trading. Research shows that incentive fees correlate to higher returns in mutual funds (Elton, Gruber, and Blake, 2003), perhaps suggesting the attractiveness of hedge funds, where incentive fees can be much higher and restrictions on trading are less.

Hedge funds employ a wide variety of investment strategies, ranging from garden-variety stock investing to betting on the outcome of merger transactions to investing in emerging markets.

The major hedge-fund indexes, which track aggregate returns for all strategies, showed gains ranging from 3.26 percent to 5.87 percent in the first quarter. By comparison, the S&P 500 returned 3.73 percent in the quarter. Increases in January and March offset the flattish results hedge funds saw in February.

Strong demand from emerging market countries for raw materials has been one of the main factors behind the commodity market bull run in recent years. Then there was the recent drop, silver is currently trading around 18 percent below this week’s 23-year peak at $14.68 an ounce and gold is about 5 percent below $645.75 an ounce, the highest level reached since November 1980.

“Fund profit-taking caused the rally to stall, triggering further long liquidation, with the resulting sell-off in a largely one-way market causing metals to drop like a stone,” said James Moore, an analyst with TheBullionDesk.

“Has it done any damage, or is it just a correction in an upward trend? That’s a tough call,” said Stephen Briggs, metals economist at SG Corporate and Investment Banking.

“It certainly reminds people that even commodities, with the euphoria surrounding them, are not a one-way bet the whole time. Up until today, we were getting into bubble-like territory. My gut feeling is that it is not the end of the story for gold. Iran hasn’t gone away, there is probable dollar weakness,” Briggs said.

Alex Akesson
Contributing Writer
HedgeCo.Net
Email: Editor@hedgeco.net

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