market folly

At the recent Russia 2010 conference, an interesting question was posed: how would you invest $100 million for 12 months? The panel included hedge fund manager Hugh Hendry, black swan-er Nassim Taleb, and Marc Faber, among others.

Taleb presented a few ideas that he would allocate to the 'risky' portion of the portfolio. He likes a short of the S&P 500 and a long of precious metals (gold, silver, platinum) in a fixed ratio of around 1.5 to 1. He also suggests to buy an out of the money option on hyperinflation through a basket of instruments on gold, treasuries, etc. He doesn't care about inflation, he wants to possibly game the slim chance of hyperinflation. He says you will probably lose money on the play, but if you're right and hyperinflation hits, you can win huge. Lastly, he also says that you should be shorting US treasuries, something we've seen numerous prominent hedge fund managers recommend.

Hendry then took the mic and was his usual entertaining self. He focused on how everyone at the conference had a different opinion and he was sick of opinions, saying "Who cares about that opinion? You pay people for what they do with that opinion." And he brings up a very good point. It's one thing to have a trade idea or research, but it is quite another thing to execute it. We've postulated that this could potentially be the problem over at Peter Thiel's global macro hedge fund Clarium Capital as they've had a rough past two years.

Hendry says that he doesn't even need to spend all the $100 million to invest, but rather just a tiny amount of it. He simply underwrites the risk that the Bank of England will cut rates further. He takes the proceeds from this and uses it to cheapen an option that bets against the English central bank raising interest rates over the next four months. If they raise rates, all he loses is his premium, which is not a lot. However, if nothing happns, he can make five times his money. It's all about the risk/reward skew. He also mentioned that he had a John Paulson-esque play where you could make 75 times your money and only risk a tiny amount, but he teased the audience and said he'd save that for another time. We've previously covered some of Hendry's hedge fund commentary on the site as he's been the resident deflationist.

Some of the answers from other panelists were also intriguing as they favored emerging market consumer plays. They also recommended avoiding: credit, real estate (especially commercial) in the western world, as well as western financial institutions.

We highly recommend watching the video of the hour-long panel here.