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Thriving firm's new bet: Hyperinflation © Nick Koudis/PhotoDisc Red/Getty Images

Extra6/5/2009 12:01 AM ET

Thriving firm's new bet: Hyperinflation

Coming off a big winning streak powered by bearish moves, a hedge fund company is wagering that worldwide stimulus efforts will have disastrous effects on currencies.

By The Wall Street Journal

A hedge fund firm that reaped huge rewards betting against the market last year is about to open a fund premised on another wager: that the massive stimulus efforts of global governments will lead to hyperinflation.

The firm, Universa Investments, is known for its ties to gloomy investor Nassim Nicholas Taleb, the author of the 2007 best-seller "The Black Swan," which describes the impact of extreme events on the world and financial markets.

Funds run by Universa, which is owned and managed by Taleb's longtime collaborator Mark Spitznagel, last year gained more than 100% thanks to bearish bets. Universa now runs about $6 billion, up from the $300 million it began with in January 2007. Earlier this year, Spitznagel closed several funds to new investors.

Unlike last year's sudden market implosion, inflation isn't an unimaginable event that few currently anticipate. In fact, many fear inflation right now amid government efforts to goose the economy. Universa's bet, however, is that inflation will reach levels few expect.

By opening the inflation fund, Universa is trying to capitalize on a wave of investor demand for its products, which when they're right can protect investors from extreme market moves.

The new strategy, designed by Spitznagel, aims to post big gains if inflation and interest rates take off as they did in the 1970s. Universa will invest in options tied to commodities such as corn, crude oil and copper, as well as options on stocks such as oil drillers and gold miners.

"We think these things are going to see massive volatility," Taleb said in an interview.

The fund will also bet against Treasury bonds, which tend to weaken in inflationary environments. Last week, Treasury yields shot to their highest level since November as prices fell on inflation concerns. Oil topped $66 a barrel. Gold is creeping toward $1,000 an ounce.

Continued: There are risks

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jl43
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Friday, June 05, 2009 6:13:15 AM
Hyperinflation?  Perhaps.  But with the current spending, at least SOME above average inflation is inevitable.  And as such, investments such as hard commodities (gold, oil, and food) and TIPs make a lot of sense.  Personally, I'd emphasize HARD commodites, since paper profits (in dollars) could be worthless if the dollar tanks.  This inflation surge may not start immediately, but it is probably a good idea to start to accumulate these assets now and BE PATIENT.  
Friday, June 05, 2009 7:04:34 AM
Once again,  more sensationalistic rhetoric  to cause premature panic. Sad I have to agree more with Rosenberg, he's taking a more sensible approach to looking in the crystal ball.
Friday, June 05, 2009 9:44:20 AM

Most economists are also warning of hyperinflation - the question seems to be the timing of it. There is a legitimate concern that the Fed will be too slow to act when it should as the economy recovers. Political pressures may be too tough for them to resist.

It would not be much of a stretch to believe that if the Fed is late taking away the punch bowl ( considering how much the injected into it ) hyperinflation could occur. In fact, it is a very real possibility.

Friday, June 05, 2009 10:16:49 AM

The US government continues to print an incredible amount of more money to finance the bailouts.  For the American currency that means a decline in value relative to other currencies, particularly the countries that do not have financial problems of the same magnitude.  Gold normally goes up when the US dollar goes down.   This has been true for decades.  Gold stocks provide investors with a greater return than purchasing physical gold like coins and bars.  There are a few good sites on the net covering gold stocks such as AmericanGoldStocks.com and MSN.  People should be selective in what kinds of gold stocks they end up buying.

Friday, June 05, 2009 11:30:40 AM
Once again we get to read GOOD news.  The media seems to thrive on making the public WORRY about something, anything!  I recall a saying from my childhood which went (I paraphrase)  "if you don't have something good to say shut the hell up."
Perhaps what the Fed is doing (has already done) will cause inflation, or hyperinflation as you choose to call it.  If that is the case just what the heck is general population supposed to do about it?  What can be done?  Nothing at all that's what, so why should we get all upset and WORRY.
Be constructive or go find another line of work!  There is already enough to worry about without you clowns pouring gasoline on the fire, or worse yet lighting another one!

Friday, June 05, 2009 11:52:02 AM
On top of it Obama wants to raise min wage to $9/hr no doubt will cause inflation to soar...time to go back to economics 101
Friday, June 05, 2009 12:45:03 PM
How cares... this article is worthless!!! A fund that takes 25M to 100M before a person can join. Go find something else to write about!!!!
Friday, June 05, 2009 12:51:16 PM

I notice that interest in gold is going up, and that people think the US currency is in trouble relative to others.  I'm not so sure. 

 

Though gold has earned about 15% in compound return over the last decade, over 200 years it has earned about 1.5%.  That ain't so great. 

 

What other currencies appear wonderful compared to the US, and is not unduly influenced by the US $?  The euro?  I don't think so.  Singapore $ looks good over time.  Swiss Francs maybe aren't as solid as they used to be?  China?  Some of these other currencies are influenced by the US $.  Careful folks before giving a lot of confidence to foreign currency thinking you are in better shape with them.   

Friday, June 05, 2009 1:42:15 PM

It does seem that something like the seventies may replay itself.  Oil price increase; check, gold marching higher; check, Fed rate, low; check, printing presses running; check. Hmm!

 

It really does look a lot like 1973.  Back then, inflation only ran in the low double digits.  The Fed no longer publishes the M3 figures, so sleuthing for the elusive answer, how fast it is growing is difficult, except that the Treasury seems to constantly auction off new tranches of IOU's.  So far the Chinese have been stepping up to the plate, but for how long will they?  Once the dollar starts to plummet, the Chinese may dump their US dollars and that might just become the next Black Swan.

 

Brace yourself by loading up on the hard stuff, gold and silver.  It seems like cheap insurance now.

 

Of course I could be wrong.  For sake of America, I sure hope I am.

 

Friday, June 05, 2009 1:43:36 PM
The reason energy prices keep see-sawing up and down have nothing to do with production levels. If production levels are below what they need to be, everyone including OPEC would be INCREASING production to take advantage of it and not cutting it down.

The reality is that there was no physical reason for last summer's super-spike and there is no physical reason for this summer's (so far not super) spike. The global store of oil and gasoline is 20% higher than last year and we are still in a global recession. Everyone KNOWS this including the real users of energy, the traders and the government.

The real reason for the spike is how Wall Street and the CBOE works. Basically, the banks, brokers, insurance companies and hedge funds cannot make money off of their traditional avenues during this global recession and due to the popping of a giant asset bubble last year: stock and bond investing, mergers and acquisitions, IPOs and consumer/commercial lending. That leaves trading and the most volatile areas are in commodities. These traders use the spread to make their money. If it were not for the traders, energy prices would be declining on the basis of real demand.

By doing what they are doing, these guys are creating a self-fulfilling prophecy and staglfation.

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