Another way to pretend that you're investing in gold

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Osmium Offers New Share Class Denominated in Gold

By Alistair Barr and Steve Goldstein
MarketWatch.com
Wednesday, January 28, 2009

http://www.marketwatch.com/news/story/osmium-unveils-new-share-class/sto...

Osmium Capital Management Ltd. is launching a new class of shares in its Special Situations hedge fund that will be denominated in gold as the firm tries to attract more money from investors in the midst of a global financial crisis.

The Osmium Special Situations Fund, run by former ABN Amro trader Chris Kuchanny, already has share classes denominated in U.S. dollars, euros, and British pounds. The fund currently oversees $178 million.

However, since the credit crunch grew into a global financial crisis last year, major currencies have become a lot more volatile, with sterling slumping and the U.S. dollar surging of late. Meanwhile, gold futures topped $900 an ounce on Monday, ending at the highest level in four months.

"We believe that this is a new way to invest in a hedge fund," Bermuda-based Osmium said in a letter to clients, a copy of which was obtained by MarketWatch. "Given the challenging market environment, some investors want exposure to gold, which has historically been a good source of value during times of economic crisis."

"Many investors are already heavily exposed to the major fiat currencies and wish to diversify into gold, without losing their ability to invest," Osmium added.

The Special Situations fund, which focuses on arbitrage trading and events like spinoffs and mergers and acquisitions, has returned more than 12% a year since it started in March 2005, according to the firm's letter to clients. It gained 2.8% in 2008, an enviable performance in light of the heavy losses suffered by many other hedge funds.

When an investor puts money into the new share class, Osmium said it will buy gold with the cash. The fund will then hedge its exposure to gold by selling the metal for cash and buying gold forward on a monthly basis.

That's similar to the way the firm already hedges its exposure to euros and British pounds when investors put money in those share classes, Osmium noted.

Investors get the same returns generated by the Special Situations hedge fund, but these returns will be denominated in troy ounces of gold, rather than in U.S. dollars, euros, or pounds, according to the firm.

At least one other firm also is using this approach: Christian Baha's Superfund, which runs funds that use computer models to trade futures, is launching the Superfund Gold LP fund.

This new fund uses the same trading strategies as the firm's other funds, but the net asset value of the new fund will be in ounces of gold, rather than dollars or another currency, Superfund explained in a November filing with the Securities and Exchange Commission.

To make this work, the new fund will buy futures contracts giving it the right to purchase gold equal to the amount of money raised from investors. The gold position will be adjusted at the start of each month to reflect new money coming in and redemptions, along with profit and losses from Superfund's trading strategy during the previous month.

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