"This is not solving the problem - it is just treating the symptoms," he said, speaking at the CFA Institute's European Investment Conference in Frankfurt on Thursday.

Faber blames Greenspan's decision to hold interest rates at artificially low levels for precipitating the housing bubble and sees Bernanke repeating the mistake in the current crisis. "The Fed seems to ignore the fact that one of the causes of this crisis was the amount of leverage in the system. This is a credit-addicted economy."

He sees central bankers as having become hostage to inflated asset markets and questioned how sustainable the next boom would be given that it was simply storing up more debt. Total US debt to GDP is now at 375 percent, without including the contingent liabilities from Medicare and Medicaid. Faber sees this having serious implications for inflation.

"When the Fed should be increasing rates, interest payments on government debt will balloon. In five years' time some 30-40 percent of US tax revenues will go on servicing that debt," he said. "Where will they get that money? They will have to print it."

But as Faber cheekily pointed out, if printing money and increasing debt made you rich, then Zimbabwe would be the richest country in the world.

Noreena Hertz, professor of finance, sustainability and globalisation at Erasmus University in the Netherlands, kicked off the CFA Institute's second annual European Investment Conference in Frankfurt with a wake up call for the assembled asset managers and bankers.

"This was not just a financial crisis - this was an existential crisis that exposed a faultline in the system," she said. "The way we thought about the world was profoundly flawed."

Hertz identified several major problems - a culture of intellectual conformity, the deification of experts like Alan Greenspan, and dogma superceding reason. She said the free-market economics that triumphed post-1979 should have been treated more as a hypothesis, not fact, but within economics debate was discouraged, and thinkers like Keynes and Minsky who didn't fit the prevailing view were sidelined.

For their part, individuals and businesses had accepted orthodox thinking and allowed the proclamations of "experts" to go unchallenged. She urged delegates to think in a more holistic way - for example, rather than just focusing on rising house prices in the US, they should have given some consideration to the amount of credit cards the average household had.

Psychology also played a part. Investors had accepted Bernie Madoff's ability to deliver an 11 percent return year after year because they wanted to believe it. "In the same way, you need to ask yourself whether the "green shoots" recovery story is so dominant because everyone is bored with bad news. Is it a political construct in the hope that it will become a self-fulfilling prophecy?"

Having unsettled delegates, Hertz offered them some hope. Replacing the individualistic "Gucci capitalism" that has predominated for the last 30 years she foresaw a more co-operative capitalism in which individuals took a more active role in helping solve complex problems like climate change, the demographic timebomb and sustainability. Everything to play for there.

Hedge fund stories from the past 24 hours from Reuters and elsewhere:

Ex-Bear trial jury chosen, some ousted for bias - Reuters

Massachusetts state fund drops 4 hedge fund firms - Reuters

Hedge funds extend gains with upbeat economic data - Hedgeweek

Watson Wyatt names global head of hedge fund research - Hedgeweek

Paulson & Co buys 9.9 pct of insurer Conseco - Indianapolis Star ]]> http://blogs.reuters.com/hedgehub/?p=1664/feed/ http://blogs.reuters.com/hedgehub/?p=1645 http://blogs.reuters.com/hedgehub/?p=1645#comments Tue, 13 Oct 2009 06:39:35 +0000 Claire Milhench http://blogs.reuters.com/hedgehub/?p=1645 Hedge fund stories from the past 24 hours from Reuters and elsewhere:

High water marks still haunt hedge funds - Reuters

Hermitage attacks Russian corruption - Irish Sun

Trial to begin for ex-Bear Stearns hedge fund managers - Los Angeles Times

Aros Capital Partners offers onshore fund - Hedge Funds Review

At the recent G20 meeting in Pittsburgh there was growing support for the idea that the world had to rebalance its out-of-kilter economy, with the surplus countries in emerging markets needing to spend and the deficit countries in developed markets needing to save. But even if your portfolio has a large allocation to Asian equities, you're probably holding the wrong stocks, argues Kaletsky.

This is because fund managers have tended to focus on the big manufacturing exporters in Asia, rather than domestic demand-oriented stocks such as retailers and food and beverage companies.

"We will see a dramatic decrease in consumption in the UK, US, and Southern European countries like Spain and Italy, offset by a dramatic increase in consumption in countries running a surplus, otherwise we could face a decade or more of extreme global deflation," Kaletsky said at a London seminar for investment firm Ashburton last week.

Kaletsky said the Chinese had accepted they could not continue to rely on exporters to achieve the desired 8 percent growth in GDP per annum and therefore domestic demand would have to pick up the baton. Conversely, he sees the US economy being export-led for the next five years, meaning that US portfolios tilted towards the big consumer stocks will underperform. "Very few portfolios are positioned for this shift," he said.

London mayor Johnson accused over hedge funds' election donations - The Guardian

Deephaven Capital's Bhatia plans Asia fund - Bloomberg

Gulf-focused fund to tap returning appetite - Financial Times

Royal Dutch Shell pension fund to expand alternatives allocation - Wall Street Journal

PREVIEW - E-mails key in Bear Stearns hedge fund managers trial - Reuters

Insurers quit hedge funds - Insurance Times

Investors fear hedge fund rules limit choice - Reuters

Hedge fund ATM moves to Washington - Bloomberg

Will the high water mark catch on - Seeking Alpha

Back to life (settlements) - HFMWeek

It is gold exchange traded commodities (ETCs) that have seen the biggest investor inflows this year so perhaps it's not surprising that the gold price broke through $1,000 an ounce this week.

"Investors are concerned about sovereign risk, quantitative easing, government deficits and the outlook for the US dollar," said Nicholas Brooks, head of research and investment strategy at ETF Securities, at a Dow Jones Indexes commodities briefing on Tuesday. "They are using gold as an insurance policy."

Physically-backed gold ETC holdings are now 8 million ounces, up 33 percent versus end-2008 levels, he said. Gold inflows have been relatively steady, even when the price has corrected, with the biggest flows coming not when Lehman went bust, but when the scale of US quantitative easing and the fiscal cost of the financial bailout became apparent. This supports the view that gold is being used as a hedge against sovereign and inflation risk, Brooks said.

Billionaire hedge fund manager John Paulson has been building up a large exposure to gold this year, seemingly as part of an inflation hedge.

John Reade, head of markets strategy at UBS Investment Bank, also confirmed that UBS clients were showing an interest in assets that would provide inflation protection. "You don't need high inflation for gold to perform well - you only need an increase in the number of people who expect inflation to rise."

Over the last 30 years the returns from gold have been reasonable but not great, with high volatility, he said. But in an environment where the US dollar is weakening, the Fed Funds rate is rising and inflation is rising, gold can be expected to perform, with returns of over 40 percent per annum if CPI increases. This suggests that an investor's tactical allocation to gold should rise in the coming months, Reade said.

He forecast an average gold price of $1,050 an ounce for 2010, pointing out that gold remains very lightly owned by most institutional investors. This was not consistent with inflationary or US dollar weakness scenarios, he said.

It's all very different from those dark days at the end of 2008. Charlie Porter, CEO of Thames River Capital, which is split 55 percent hedge, 45 percent long-only, says most firms were focused on survival. "No one knew where their businesses were. A lot of hedge funds have disappeared over the last year but there were probably too many of them."

He says new firms are now starting up again - albeit at a slower rate than before. But it remains to be seen whether mainstream firms will continue to flirt with absolute return, after products like 130/30, which take both long and short positions, performed so poorly.

Aymeric Poizot, a senior director at Fitch Ratings, believes many absolute return products disappointed investors because they weren't diversified in terms of their performance drivers. "You can't make alpha if you don't have breadth or depth. You need to be able to take many uncorrelated, diversified bets," he argues.

Cultural issues bedevilled some mainstream firms attempting to run their own absolute return processes and it is questionable whether some offerings can survive in their current form. Certainly, the labels are likely to change. "130/30 is largely a horse's arse," says Porter. "It has proved popular for some US institutional usage but in the UK retail space, the good products are few and far between."

However, he sees the growth of absolute return within the traditional investment industry as a positive development. "If products can be created that more reliably generate consistent outcomes for investors, it must be a good thing," he says. "

Malkiel, in town to beat the drum for Vanguard's index funds, argued that China will be the biggest economy in the world in 20 years' time, but most investors are underweight the emerging giant. "I'm a real expert on China - I've been there five times," he joked, but made the serious point that most investors have a home bias.

"In general, people are inadequately diversified," he said. "When people ask me how much international diversification they should have, I say: A lot more!" He conceded that asset class diversification had not been much help last year when markets collapsed in a great unwinding, but added that gold and US Treasuries had provided some relief.

Malkiel believes investors would do much better if they didn't try to time the market - because they invariably get it wrong.

Over 15 years, between 1994 and 2008, those who stayed the course enjoyed an average annual return of 6.5 percent, whilst those who missed the best 30 days were down 3.7 percent per annum. If you stayed out longer and missed the best 90 days, you'd be down 14.6 percent per annum on average.

Similarly, those investors who save regularly, putting money into markets every month through good times and bad, benefit from dollar cost averaging, essentially buying more units for the same monthly sum when prices have fallen, and then enjoying any subsequent appreciation.

It's a victory for the tortoise, not the hare.