One of my between-jobs, hedge-fund-manager friends is just off for a week or two lounging around in Kenya. I asked him what currency he was taking with him. His answer? He had been planning to take a wallet full of dollars, just as he usually does when he goes off to what he considers to be the third world. Then he asked the friends he is staying with for their view. Get Kenyan shillings, they said. Shopkeepers, taxi drivers and bar owners won’t take dollars, pounds or even euros any more: they are all considered to be both “too weak and too volatile”. How’s that for a sign of the times? We’d prefer shillings, too. But over even these we’d still prefer gold.
At MoneyWeek, we’re with Nairobi’s shopkeepers. Six weeks ago we ran a cover predicting that the grossly overvalued pound would soon tank. It has. We also suggested that you might buy dollars instead. That would have been a good move – the pound is now at a 22-month low against the dollar. But while we are pleased that some readers will have made a short-term gain on the US currency, I’m not sure we’d want to hold it over the medium term any more than we’d want to hold sterling. Both countries are a mess. Both have whopping trade deficits, rising unemployment, unclear inflation futures, and free-falling house prices.
This means more people will default on more debts, that repossessions will keep rising and that last week’s sale of a Detroit house for $1 is the beginning not the end of a trend (see Want to become Paris Hilton’s best friend? Apply here). The eurozone is no better a prospect (see A darkening outlook for European stocks). So why hold the dollar, the pound or the euro? We’d prefer shillings, too. But over even these we’d still prefer gold. We look at why in Why sterling is going ‘to hell in a handbag’, but the basic point is that with the financial system still in much more trouble than its leaders will admit and much of the world on the verge of recession (be it inflationary or deflationary), gold is about the only real portfolio insurance there is.
That might be something for still-employed hedge-fund managers to consider – they’re having a horrible summer. The SRM Global Master Fund run by Jon Wood is said, by The Wall Street Journal, to have lost over 80% of its value since inception in 2006 and 77% in the last year. That must be irritating for the many investors who gave him their money (the fund initially raised $3bn). But not perhaps as irritating as the fact that lock-ups mean they can’t even get the pennies out that might be left. Still, Wood isn’t the only one having trouble with today’s markets. According to The Times, the HFRX index of hedge-fund returns was down 2.82% in July and has lost 1.59% so far this month.
Markets are tough right now – I certainly wouldn’t be wanting to be under pressure to make money, nor would I take kindly to being criticised for failing. But then I’m not a hedge-fund manager – I haven’t told my clients I will make them absolute returns regardless of market conditions. And I’m not charging them an arm and a leg for not doing so.