SuperInvestor Insight 8February 27, 2009 www.superinvestorinsight.com

Signs of the TimesHow most money managers hedge their bets is generally not easy to track, but two hedges against bad thingshappening in the broader economy were very clear from the buying activity of SuperInvestors last quarter.

Hedge fund managers, as befits theirname, often employ a wide variety ofhedges against broader macroeconomicfactors impacting their individual invest-ments. A long position in a specific oil-company stock, for example, might beoffset by a short position in the underly-ing commodity. The goal is to reduce theimpact of macroeconomic factors on theportfolio and shift risk to how well specif-ic investments have been chosen.

Many of these macro bets aren't trans-parent to outsiders, but two of the mostwidely bought share positions bySuperInvestors last quarter appear to bejust such broad-based wagers, using pub-licly traded ETFs. The first, SPDR GoldTrust [GLD], invests directly in gold bul-lion, with each of its shares representingroughly one-tenth of an ounce of gold atcurrent market prices. The second,ProShares UltraShort 20+ Year Treasury[TBT], is a bit more complicated, but isconstructed so that the returns on itsshares deliver twice the inverse of the per-formance of a Barclays Capital long-termU.S. Treasury bond index. Its effectively aleveraged bet that Treasury yields will rise.

Investing in gold is an oft-debated strat-egy among money managers. Equitystrategist James Montier summarized histake on the debate in an interview last yearin Value Investor Insight (October 31,2008): Gold kind of scares me becausevery often the people involved with it seemto be slightly insane. My other problem isI don't know how to value it. Unlike anequity that supposedly has cash flowattached to it, or unlike a bond that has acoupon, gold isn't worth anything intrinsi-cally beyond what somebody is willing topay for it. That said, I certainly see whygold could be considered somewhat of aninsurance policy, if not an investment in itsown right. Any systemic economic turmoilis likely to drive gold prices higher.

David Einhorn of Greenlight Capital,

whose largest reported position at the endof 2008 was in SPDR Gold Trust, elabo-rated on the gold-as-insurance-policyargument in comments before an invest-ment conference earlier this month inNew York. As government authorities goall in to try to mitigate the near-termeffects of economic collapse with aggres-sive monetary and fiscal policies, he said,the risks of inflation and of the deprecia-tion of the U.S. dollar have increased sub-stantially. Were such risks to come topass, gold would likely perform very well.Our instinct is that gold will do welleither way: deflation will lead to furthersteps to debase the currency, while infla-tion's effect speaks for itself, he said.

While star investors' interest in gold isnot likely a short-term trade, the trade so

far appears to have been a good one.SPDR Gold Trust shares are up 40%from their 2008 low of $66 in November.

The interest in the ProShares ETF hassimilar elements to the wager on gold.Inflation, a declining dollar and thestrained balance sheet of the U.S. govern-ment is no recipe for robust Treasurybond prices, especially from their currenthigh levels. Even if Armageddon is avoid-ed, the outlook for Treasuries might besuspect, as Baupost Group's SethKlarman pointed out in his most recentinvestor letter: When economic recov-ery is anticipated, when investors decideto take a bit more risk, safe govern-ment bonds will fall significantly in priceand frightened investors who overpaidfor safety will be tallying their losses. SII

S T O C K S P O T L I G H T: H E D G E S

SPDR Gold Trust(NYSE: GLD)

Share Information(@ 2/26/09):

Price 93.0652-Week Range 66.00 100.44Net Assets $24.93 billion

Hedging Their BetsUnusual times warrant unusual measures: Two popular bets last quarter by SuperInvestorsusing ETFs, one long the price of gold and the other short Treasury bond prices, could payoff handsomely under a variety of future economic scenarios most of them bad.

2008 2009

ProShares UltraShort 20+ Year Treasury(NYSE: TBT)

Share Information(@ 2/26/09):

Price 47.6252-Week Range 35.51 75.00Net Assets $2.94 billion

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