Fund Blamed For Gold Sell Off, Salida Capital, Tumbles 37% In September, 49% YTD

Tyler Durden's picture

Last week, a fund rumored to be on deathwatch, was Toronto-based, gold and energy-focused hedge fund Salida Capital (whose gold exposure, in addition to Paulson's, were both factors in the rapid drop in the price of gold last week, following concerns that it was being liquidated in the open market - for more on Salida's gold exposure, read the attached letter). The fund promptly came out and refuted said rumors, however upon review of its monthly P&L, we are somewhat skeptical about its survival chances, even if, in principle, we agree with the fund's investment philosophy. The reason for our skepticism is that Salida was down a whopping 37.2% in September, and 49.4% YTD, a collapse which only compares to that of Paulson's Advantage Plus, and demonstrates vividly just how much of a misnomer the name "hedge" can be when applied to members of the asset management industry. What is worse, however, is that the reason attributed for this epic collapse is amateur hour 101, and any LPs should be far more concerned by the explanation provided for this underperformance than the actual underperformance itself.

Salida says: "September was an extremely difficult month for the Salida Strategic Growth Fund, which fell 37.17% in the month and 49.44% year-to-date. On the back of August's market selloff, we felt that our core gold, energy, and other resource names were trading at very attractive levels, particularly in light of prevailing commodity prices. We further felt that the Fed was moving ever closer to a QE3 announcement, and even more importantly, U.S. money supply had been growing extremely strongly through the summer months even without a QE program. U.S. money supply growth in recent years has proven to be very reliable leading indicator of risk asset markets. So far, however, it appears that this newly printed money has this time flooded into U.S. treasuries offering record low yields." In other words, it's all M2's fault. The problem with this simplistic observation is that as we pointed out two months ago, the move in M2 has nothing to do with the Fed, and everything to do with asset reallocation, when investors scrambled out of equities and into the "safety" of their bank accounts. Furthermore, the unwind of Regulation Q was also a main driver for this surge in the broad monetary aggregate. Alas, Salida made the most fundamental rookie mistake in finance and assumed correlation to be causation (as did Art Cashin, Dennis Gartman and Andy Lees) of Fed stimulus. The irony is, as we said, that we agree with Salida's underlying premise: "With an election year looming, a sputtering economy, and a Fed Chairman who has in the past touted the ability of unconventional monetary policy to cure such economic woes, we believe the [QE3 Large Scale Asset Purchases] announcement will come." Alas, the question is when. And as Salida just found out the very hard way, in finance you may be 100% right eventually, but if your timing is off, well, as Salida itself says, "True money–printing QE3 will come — timing is the question." In that, at least, they are 100% correct.

As for the reason why gold sold off so precipitously two weeks ago, a lot of it has to do with feedback loop concerns that Salida (as well as Paulson and other long-heavy funds) may be liquidating. From the fund's letter:

On the back of this surge in money supply, we made two mid–August investment calls:


1. We continued boosting our exposure to gold, believing it to be a relative safe haven, and that it would continue to attract inflows as QE3 speculation grew in the face of a renewed U.S. recession. While bullion performed well in 2011 through August, it was hit hard in September, falling a dramatic US$200/oz in only a 3–day span. Margin hikes by the CME and the Shanghai Gold Exchange, disappointment from the Fed, and rumours of redemption/margin call–driven fund liquidations and European central bank selling took their toll. These factors tend to be temporary in nature. In fact, with much of the developed world now in or close to recession, European sovereign debt concerns intensifying, and Chinese growth appearing to slow, the fundamental backdrop for gold has rarely been more compelling. A bet on bullion is a bet that central banks are about to ramp up money printing — a logical bet in our view. In fact, we feel safer in gold than anywhere else in today’s market.


2. We felt that a money growth–fuelled market rally would provide a good bounce to beaten–up energy stocks given the relative resilience of the oil price. Not only did the bounce not occur, but the sector has continued to sell off. Sell off is an understatement — it’s been decimated, with the WCAT ETF (a basket of mid–cap energy stocks) falling almost 40% over August and September alone. Our impression is that the sell–off is at least partially driven by forced fund liquidations (i.e. selling to meet margin calls or redemptions). While these factors tend to be temporary in nature and unsupported by fundamentals, we admittedly have less confidence in the short term outlook for the price of oil than we do in gold. It’s not $80 WTI (or $100 Brent) that has investors spooked — it’s the potential for oil to head lower in the near term. And with recessionary conditions spreading, we can’t totally dismiss such a scenario. Accordingly, we’ve now raised our level of hedging in both the energy sector and the broad market.


These two calls have been costly, as the market has moved against us. We still believe that the reasoning was logical, but arguably ill–timed. In hindsight, we underestimated the short term impact of forced selling.

Considering that the letter was written October 3, it is probably safe to assume that Salida was not the source of gold liquidation. At least not yet.

Salida's Monthly Performance Letter (pdf)


And Salida's October Commentary - worth a read (pdf)


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??'s picture

Courtenay Wolfe CEO of Salida  bought lunch with Buffett in 2009 for $2million LOL

Salida Q3 2011 Quarterly Webcast 2011-10-05
Hear from Courtenay Wolfe and the Salida Capital Investment Team as they discuss the quarter in review and their market outlook.

Courtney and Bill Clinton

disabledvet's picture

Is that all she bought? Her nose seemed a little out of joint when she walked on stage.

prophet's picture

She apparently buys butter in Bangladesh.

philipat's picture

Having a bath with Buffett would also have resulted in nothing more than a rubber ducky?

Global Hunter's picture

Hey they blew up in 2007 or 08 as well.  Not bad 2 times in 4 years although they call themselves a hedge fund, hedged as in highly leveraged small and mid cap mining positions.

About 2 years ago they made front page news in Canada when they paid half a million or so to have lunch with Warren Buffet.  

"First we lose your money then we use the rest to have a six figure lunch with a greedy evil lying geriatic."

Go Salida...

A Man without Qualities's picture

 "hedged as in highly leveraged small and mid cap mining positions"

It's funny how many funds call themselves hedge funds, when there is no fucking hedge, but rather one single leveraged punt.  Don't they realize they would be better off simply buying AUD vs JPY or EUR vs USD, as it would be far easier to unwind the damn thing?  The worst of these is Paulson - a pure bet that the Fed can generate the exact sort of inflation they want.  Actually, thinking about it, they posted the JAT portfolio here the other day and that was simply the worst pile of crap I had ever seen...

GeoffreyT's picture

lol - yep... "hedge" no longer means "hedge" - it has meant 'leveraged punter' for years.


I bleated about this back in June 2006 - see ), to wit:

"A hedge fund (at least one) just died and went to Hedge Fund Heaven. There is not other way to explain the massive downdraught in Gold and Silver, and the tendency of equities to experience "Don’t care about the price" selling late in a given session – despite the fact that timing is right for a bounce, the price level was right, and there was a valid divergence. It was an ohbvious candidate for a contrarian low – what, I have to be a ‘contrarian contrarian’ now?.

Now when I say "Hedge Fund", I actually mean that sort of fund that takes people’s money and punts in a highly leveraged way. Technically, that’s not a ‘hedge fund’ – it’s a leveraged punting vehicle: I don’t have a problem with such vehicles, so long as clients don’t think that the term ‘hedge’ in the name means that there’s actually any hedging going on. Anyone who thinks that will eventually do their balls.

Thing is, it’s relatively easy to perform in a stellar fashion if you’re trading with leverage and relatively small amounts of money (say, less than $100 million – although I would reckon that even $50 million is hard enough to place on a day to day trading basis). But when the thng goes well and attracts larger pools of money, the traders (they are NOT ‘hedge fund managers’) start enjoying growth in FUM (Funds Under Management). They have an incentive to grow FUM due to their performance pay scales (a 1% performance bonus on $10 million is a nice bonus, but what if FUM was a billion?…) and their ‘standard’ management fees. (What – you thought these guys would go ‘no win, no fee’? Are you out of your fucking mind?). (Ooopsie… sorry about the lingo – I have been watching Season 6 of "The Sopranos"… great stuff).

So anyway – you can bet your last twenty cents that the traders runnning the fund aren’t broke… but the fund sure as hell is."

Zero Govt's picture

" can bet your last twenty cents that the traders runnning the fund aren’t broke… but the fund sure as hell is."

Clearly the financial community has some kind of immunity from losing your shirt as i thought all else in the private sector could due to recent legislation on Directors responsibilities?!!

Ho Hum.

As Global Hunter posted above this is the 2nd time in 3 years no less Salida has blown up. What do you need on your CV to get a job at these Hedge Funds, "Loser" ?

upWising's picture

"still logical, but arguably ill-timed."

I think that's what you say when you pull the pin on a grenade and forget to throw it.

Zero Govt's picture

and same result, blown up (fast) in a puff of smoke  ;)

Vampyroteuthis infernalis's picture

Implosion bitchez!!! I had to say it.

upWising's picture

SALIDA = "EXIT" in Spanish

Time to head for the EXIT on this sketch fund.

SALIDA, BITCHEZ!!!  I had to say it.

(¿ What were they THINKING when they named this one ?)

Snidley Whipsnae's picture

Exit = Egress ... but since few seem to know what egress means, they could have named it Egress Fund.

The market can remain irrational longer than Egress Fund can remain solvent.

Too bad they didn't invest their initial capital into physical PMs... Their hair wouldn't be on fire.

Spitzer's picture

I am not totally buying this redemption shit. When people redeem, the money has to go somewhere. The liquidation reasoning only covers half of the equation.

I guess people are liquidating and buying more treasuries then gold.

Christophe2's picture

I think people are entirely ignoring the 'win' in Libya.  Gaddafi had twice as much gold as the UK, and god knows how many tons of silver, as he was planning on releasing gold and silver-backed money for the entire region...


It was about a week or two after the Libyan capital and surrounding area was under NATO control that we saw the prices of gold and silver crash-fall, which allowed the paper pukes to unwind their 'unwise' shorts at a relatively low cost...  Coincidence?  I think not.

disabledvet's picture Tango dancing...the "salida" means "the beginning of the dance."
that's a tango you don't see everyday.

X.inf.capt's picture

well, i know alot of ZH'ers who want to lncrease thier phyiscal PM pile, so i hope they drive the price lower, short term at least....

keep up the the good work...

alot of holders are counting on you...

DosZap's picture


well, i know alot of ZH'ers who want to lncrease thier phyiscal PM pile,


The DIP is happening NOW.

If Europe doesn't pull thru PM's will be thru the roof.

If they fix their problems, PM's will go UP.

You buy now, or lose/lose.

X.inf.capt's picture

oh yeah, brother, im still buying,

i do'nt think we have much time left at these prices....

though  low $20's would be nice

DosZap's picture

though  low $20's would be nice

In OUR Dreams...........................

My ususal 100% dead on supplier had nothing but 1oz rectangles(junk), and 100oz Ohio bars..................

So, I settled for the bars.

Folks, need to be loading up on Plat at these prices.

Production cost is within a few bucks of $1,500.00 an oz.And since 3/4ths rhwe worls supply comes from Africa,and new mines cost over a billion and take a few years to bring online, as soon as their is a shortage(mine strike),plus theirs not a lot lying around,it's usually mined w/rhodium,and palladium,they will take off.( all hard to find, and costly to get to).

X.inf.capt's picture

yep, ive been buyin' on the way down,

even took coins out of my type set, per your suggestion, but...

IM NOT SELLIN' MY 1916-D dime in IN VF-20....


Ranger4564's picture

The thing about Plat / Pall is that you need an economy to actually use the metals industrially, to deplete supply / increase demand.  In fact, I'm of the opinion that Plat / Pall will continue to decline and G / S will continue to increase, as the economies globaly collapse.  Just my humble opinions.  I own G / S.  Actually, most of my assets, 90% are in G / S I am that sure.  I own the other 10%  in USAGX which I'm thinking of liquidating to be 100% in G / S.  OK, I do have cash and household items, but I'm referring to investments.

totem's picture

I agree that a DIP (and possibly the DIP) is underway.

Question is, do you think the Salida liquidation means that we're nearing the end of the PM liquidation phase or it's just starting?  If the latter, then biting the bullet and hanging out in paper for a while longer may be advisable.

I think there's still a grand liquidation event headed our way, so then based on your recommendation, I'm a "lose/lose."  Oh well.

Patience peeps!

americanspirit's picture

The Tyler Durden Detective Agency doing some of its finest work! This just reinforces the argument that the markets for gold ( and silver) are so thin that the actions of one player of significant size can cause significant moves. It doesn't take a global conspiracy of cloaked manipulators - just one small set of idiots can make waves.

Buy physical and hold on to it. When prices drop, buy more if you can. Take a 3-5-10 year view and you will win.

BlackSea's picture

As the adage goes: the best time to buy physical is when you have extra cash.

junkyardjack's picture

Well Salida proved the point for the Gold bugs.  Yes the Fed will print eventually but when will that be?  How far down will prices collapse before it happens?  Gold is a great long term investment just like a house can be but if prices are collapsing you might want to let them go down for a while before you hop on in.  Gold doesn't lose its value in theory but that doesn't mean its price has to go up, when the price of everything else goes down so will the price of gold.

DosZap's picture


Rational thoughts......................however.

While we DIDDLE ourselves,the Chinese/Indians/Asians, are SCARFING up physical by the tons.

IF what you say did happen, you have to ask yourself(prices bottom),East buys ALL they can get.

WILL there be any phys left for you, if you decided to purchase.

We are short now,Silver is almost impossible to get,(6-12wk deliveries,on anything but 100oz bars, and prems are up on both.

And this is at the low in the mkt.

Where do they go if it turns?.

Snidley Whipsnae's picture

Excellent advice AmericanSpirit. Take the long view... Let these dip shit fund managers that think they are going to time the Fed moves get their asses handed to them.

How can they time the Fed when the Fed can't time the Fed?

slewie the pi-rat's picture

QEIII - LSAP + Reg. Q = deflation?


Mike2756's picture

How many more are out there? Seems too many are still betting on a dollar collapse.

bigwavedave's picture

If GLD doesnt hold the 150 line they are toast. If not already.

sgorem's picture

+1 for your post. +100 for your avatar Dave......

Rynak's picture

It's kinda cute when the puppets talk to each other.

FoieGras's picture

These guys are tiny, managing about $900m total over a wide number of funds. That's a drop in the bucket in the gold equity, bullion and energy equity world.

Whatever happened to the gold stock/bullion and resource stock markets, this insignificant fund had little if anything to do with it.

Global Hunter's picture

900mm leveraged up 10x is signifigant when you consider precious metals and pm mining stocks account for about 0.15% of mutual fund holdings in the US (read the 0.15% figure here on ZH about a month ago).

bob_dabolina's picture


Look at the first SCRIBD that Tyler wrote above. 

Gross Long: 144.05%

Gross Short: 9.89%

And it's a gold and energy centric fund so they had some levered gold positions for sure.


A Man without Qualities's picture

gross long = 1.44 x 900mm, so about $1.3 bn.  Gives an idea what impact Paulson unwind would have...

I think the smart move might be long physical, short futures... any collapse is going to cause a short term scramble for cash... 


bob_dabolina's picture

If you read the last sentance of Tylers article he(they) posit that Salida hasn't unwound yet.

I'm not sure about going long physical and shorting futures, that kinda' sounds like 'selling short against the box' which is really only used for tax purposes pre 1997.


any collapse is going to cause a short term scramble for cash... 

So you wouldn't want to be in gold, you would want to be in cash. If margin calls sweep through during a crisis you could see gold hit $1,000 (maybe lower). If you think I'm being hyperbolic gold fell what....$200 in two days? Almost $400 in a month. I'm not saying it's going to happen but should a crisis materialize I wouldn't take it off the table. Paulson liquidating GLD could cause gold to correct 20% ALONE which at these levels would bring gold to around 1,300.

prophet's picture

When a Paulson gold class LP goes into the fund and when they come out of the fund do they pay in / redeem in gold or cash?  If redemption is in gold then does the fund hold gold for gold class LPs and borrow against it or will the fund have to buy gold to pay out in gold?

Spitzer's picture

Redeemed money has to go somewhere.

I dont think a jump from a hedge fund-to cash-to gold all in 5 minutes will produce a rally in the cash.

Atomizer's picture

I can only imagine that Pet Rocks will be used as leverage to recapitalize the European Banks.

DormRoom's picture

There will not be QE3, unless CPI becomes deflationary.


Bernanke is a Freidmanite.  If you increase the money supply in an an environment of non-negative CPI, you increase inflation in the long run, and risk stagflation.


look @ Britain for Christ sake.  consumer inflation is 4.5%, and very high unemployment.   That country is in the grips of stagflation.  And yet they applied more QE. Jesus.


So ZH is correct, before you get QE3, the US needs to be in a deflationary environment.  But by that time, you would have lost 50%, or worse in equities.

Atomizer's picture

I beg to differ, Burnanke has no other choice but to come up with another unconventional scheme to inject monies into economy. He needs to get to .82-.84 DXY, then the debasement cycle can begin and equities will soar.

The O'Messiah will praise himself in saving the economy.

DormRoom's picture

DXY is only one factor.  The 3 board dissenter have already suggested QE to be stagflationary in their recent speeches.  Volcker alluded to  it in his recent NYTimes opinion piece.


Daytraders want QE so it can juice the market, because hedgefunds can apply more leverage, and push up equity prices short term. 


But by itself, QE does not solve unemployment.


It's like getting more free chips @ the casino, while the building is about to collapse in on itself.

Rynak's picture

Are you suggesting that fed desicions are based on sanity, reason and efficiency, regarding the economy?

If yes, please feel yourself be laughed off the stage.

Motley Fool's picture

Amusing as that is, their decisions are sane. They are just based on a different set of assumptions.

Rynak's picture

I suspect "i won't be there, you won't be there" is part of those assumptions?

Motley Fool's picture

Nope, they are not. I'll tell you this much, gold is, and ft knox aint empty or full of tungsten.