After their Black Swan fund gained 234% in 2008 (year of the black swan), and realizing that future years can't all be black swans, (ie. they are at the top of their game with the Black Swan strategy) management company 36 South is starting a Hyperinflation fund. Can't they just invest their black swan for a hyperinflation environment? Or is hyperinflation not technically a black swan because while it is an outlier negative potential event, it is one we can conceive of. (If I did my Taleb reading correctly, black swans are those events that are hard to conceive of beforehand, not simply rare potential events)
Thus perhaps their Black Swan fund can't invest for a potential hyperinflation scenario since they themselves have conceived of the scenario as plausible. What a dilemma, it must be complicated business investing a black swan fund... the moment you realize the event you're hedging against, you might have fallen outside of your mandate!
The Excelsior Fund targets returns that will be five times the average annual rate of inflation of the Group of Five economies -- France, Germany, Japan, the U.K. and the U.S. -- should the rate exceed 5 percent, Jerry Haworth, co-founder of the firm, said yesterday.
Ok, so it's actually a global hyperinflation fund. Less promising in my view. Hyperinflation in Japan? That definitely seems like a bit of a black swan, thus perhaps more suited for their black swan fund. Better would be to simply do a US hyperinflation fund, though simply an ultrashort US treasuries ETF might do the trick, and you can make money even with moderate inflation. But I understand, it's a marketing thing. There are a lot of hyperinflation hedges out there, so they need to really stand out. Sounds like a good business idea to me, sort of similar to their Black Swan fund... in that they are less likely to be held accountable to their performance. Basically, if there isn't hyperinflation, then no one can blame them. If there is, then I am sure whatever out of the money derivatives they can buy today will make money and they will be praised. Can't a computer program, using derivatives, be made to simply index itself for returns in a hyperinflationary environment? Do they even need much in terms of human management once the model is set?
Here's my hyperinflation fund. Keep buying deep out of the money call options on the Ultrashort US Treasuries ETF, ticker TBT. And just keep rolling the positions as they expire worthless, for a small loss. If hyperinflation happens, TBT will be in the stratosphere and your dirt cheap options will be worth substantial amounts. And you won't have to pay 20% in performance fees.
The author owns shares in TBT.
TBT? really?
I don't understand this. Let's say you own TBT and there is hyperinflation. And it's continuing. How do you get out? Once you sell you will have huge number of dollars which will be shrinking, but possibly worth very little. How can this work?
Also there is the risk that the "financial instruments including derivatives" which TBT
uses internally will explode/fail in some way under these conditions and you will
never receive your "huge number of dollars".
Now in a slow/creeping inflation TBT might make more sense (but not something that I would try).
The US Treasury has to sell about 5T of debt in 2009. Who is going to buy it?
If the Fed has to buy it to avoid an auction failure...
In terms of what to do with
In terms of what to do with your dollars when you sell out, if there is hyperinflation, you just need to switch into a non-dollar asset right after closing your position. As long as the time delay between the two transactions isn't long, it would be fine. Keep in mind the hyperinflation strategy I mused about is just buying call options on TBT, not actually buying and holding TBT.
As to whether the derivatives used by TBT would fail in some way, sure potentially anything has a small chance of happening, but I bet they are using exchange traded (not over the counter) derivatives so probably wouldn't be a problem. Same thing could happen for whatever the Hyperinflation fund will be using by the way.
And what would you by in
And what would you by in advance of a deflationary scenario now that Treasuries have to be considered a downgrade candidate and can't necessarily be considered as a risk-free equivalent?
If treasuries are downgraded,
If treasuries are downgraded, then anything short them, including an Ultrashort ETF, should perform well.