(February 6, 2012) — Dallas-based hedge fund manager Kyle Bass is pushing the head of Texas’s $19.1 billion state university endowment to hold onto its gold investments, Bloomberg has reported.
“I’m against selling any of the gold,” Bass said during a meeting of fund directors in Austin, according to Bloomberg, stressing the need for a hedge against growing risks fueled by government deficits in the United States and Europe. “As every day goes by, I see deflation in the things you own and inflation in the things you need.” In April, Bass advised the fund on holding gold bars as opposed to futures contracts.
In the four months to December, the endowment funds overseen by the University of Texas Investment Management Co. (UTIMCO) lost almost 3.8% on invested assets. In 2011, UTIMCO’s allocations rose in real estate, natural resources and hedges to hedge against declines in equities.
In 2010, the University of Texas made headlines when — amid fears and expectations of turbulent international financial markets and high inflation — it invested $500 million in gold, a commodity whose value usually only grows due to fears of inflation. “The $500 million commitment in gold by UTIMCO was a tactical allocation decision made by management,” Zimmerman told aiCIO in July 2010. “UTIMCO has been laddering in this exposure over a number of months. The investment in gold was a hedge against lack of confidence in financial assets due to lack of government fiscal and monetary discipline.”
UTIMCO’s commitment to gold jibes with a recently published article by consulting firm NEPC, which asserted that gold should not be used as a cure-all by institutional investors facing poor returns. “Using it will not solve all the other challenges investors face from hostile capital markets, political uncertainty, or evolving technological change,” NEPC noted, adding that gold can have a place in investors’ portfolios, but investors must do other things well in order to meet the obligations of their investment programs.
NEPC continued: “In times of elevated market volatility, investors cast their eyes to any asset category that rises as stock markets and other risky assets fall. Amid the turmoil of the last several years, only a few assets have risen consistently in price – prominently US Treasuries and gold. In fact, one cannot go very far without encountering the topic of gold.” The firm concluded that gold has three potential roles in institutional investment programs:
1) As a component of a broader real assets investment allocation to help hedge against inflation,
2) As a source of alpha for trading-oriented strategies such as global asset allocation and global macro,
3) As a component of a “tail-risk” hedge against extreme economic environments.