Hedge fund that gained 103% on gold rally trims exposure

[VANCOUVCER] Delbrook Capital Advisors, a hedge fund specialising in metals and mining, more than doubled its return this year playing the precious metals rally. And now it's trimming some of that position.

Vancouver-based Delbrook Resource Opportunities Master Fund LP climbed about 22 per cent in July, up 103 per cent for the year through last month, according to a letter seen by Bloomberg. Its benchmark, the SPDR S&P Metals & Mining ETF, rose 8.1 per cent in July and was down about 22 per cent for the first seven months of 2020.

The fund benefitted from "the tactical decision to overweight precious metal equities, specifically mid-capitalisation production and development names, while increasing portfolio hedging via sector-focused ETFs (exchange-traded funds)", wrote fund manager Matthew Zabloski.

Investors have flocked to safe-haven assets amid massive central bank stimulus and lower real rates, sending gold surging to record levels this year. Bullion hit an all-time high on Aug 7 before posting its first weekly drop in more than two months.

Mr Zabloski, who predicted a further rally in the precious metals sector as recently as June, is now taking a pause as gold stock valuations have strengthened. To be sure, he still sees "a very compelling case for uncorrelated return that hard assets provide". However, he thinks "it is prudent to selectively reduce exposure to specific sub-sectors of precious metals, including the mid and small-cap names".

He also cautioned that if economic data provides a positive surprise and the decline of the US dollar reverses, it "could trigger an exit of generalist capital out of the space at a speed that would lead to a rather painful whiplash". This was somewhat apparent on Wednesday as the US dollar rallied and gold tumbled after US Federal Reserve minutes noted a rebound in consumer spending.

BLOOMBERG