UPDATE 2-Sharp drop in gold caught many funds off guard -Burbank

Mon Apr 15, 2013 7:02pm EDT
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By Svea Herbst-Bayliss

BOSTON, April 15 (Reuters) - Hedge fund manager John Burbank, a long-time investor in gold, said the recent sharp selloff in the precious metal came as a surprise to many investors as some economic improvement and a general decline in commodity prices took their toll.

The San Francisco-based manager called last week's dramatic decline an "unexpected event" that caught some hedge funds off guard because they were betting that inflation would rise at a time global central banks are sticking to easy monetary policy.

The slump in gold prices could complicate second quarter returns for hedge fund managers that went into gold several years ago as a long-term hedge against a jump in prices across the economy.

Up until this year, gold was a sure-fire bet for many managers, as the precious metal has risen sharply. But Burbank said the slump could be punishing for managers who did not adequately prepare their portfolios for the selloff.

"Most people who are long gold are only long," Burbank said in a telephone interview.

His own fund, $3.7 billion Passport Capital, however was hedged by owning physical gold and betting against gold mining companies, whose share prices have dropped dramatically, he said. The fund rose 5.9 percent during the first quarter and has gained a net 18.6 percent per year, on average, since Burbank launched the fund more than a dozen years ago, an investor said.

Others, however, did not seem to take the steps Burbank did.   Continued...