Altana Inflation Risk Report

Altana Wealth strives to generate positive real returns across all economic cycles. In a world with too much debt and unprecedented currency “printing,” this means that we must be particularly focused on inflation.

Inflation risk: it’s time to act!

Inflation is the greatest destroyer of investor wealth. Since 1960, over two thirds of the world’s market economies had inflation of more than 25% per annum. On average, during such episodes, investors lost 53% of their wealth in real terms.[1] In many cases, their losses were much worse.

Thankfully, investors can effectively hedge their wealth against inflation. To do so, investors should proactively explore their options and place their hedge in advance of possible adverse events.

Investors should prioritize the inflation risk

We feel that many investment advisors miss a major point about inflation: even if they believe that deflation is a more likely outcome of the economic crisis, inflation is still the greater risk.



Investors should be concerned about the adverse effect of both deflation and inflation, but in planning to mitigate these risks, they should prioritize inflation and investment products that provide adequate protection against it.

Historical perspective

Runaway inflations emerge when an economy’s debt burden becomes unsustainable. On that count, the U.S. economy is already in the hot zone: while its GDP growth has slowed to below 2%, credit market debt is compounding much faster at over 3% annually. Over indebtedness amid sluggish growth could ultimately lead to high inflation. Historically, periods of high inflation tend to span up to a decade, decimating investor wealth, as the following examples illustrate.

Inflation causes

An external shock could accelerate inflation

While inflation pressures may be building within the US domestic economy, our greatest concern is with the risk of external shocks that could catalyze a sharp and sudden devaluation of the US dollar and trigger runaway inflation. A variety of factors might trigger such a shock, like the worsening fiscal and monetary imbalances, weak economy, European crisis, new banking failures, erosion of US dollar’s reserve currency status, or a major geopolitical crisis.

When inflation

Best hedge: exposure to commodity futures

High inflation entails steady erosion of currency’s value against real assets like energy, metals or agricultural commodities. To protect their wealth, investors need exposure to prices of heating oil, gasoline, silver, gold, copper, corn, soybeans, coffee, cotton, and other necessities.

To hedge against inflation, the one best option is exposure to commodity futures through CTA funds like Altana Inflation Trends Fund.

Much empirical evidence strongly supports this common sense solution. An important research report published by Alliance Bernstein found that commodity futures have the highest inflation beta[2] of all asset classes: 6.5!

Commodity futures: diversifier with highest inflation hedging properties

Commodity futures

Another report[3] looked at the performance of CTA/Managed Futures investments between 1980 and 2011 comparing them to asset classes like equities, bonds, commodities, and gold. Even after taking survivorship and backfill biases into account, authors concluded that:

“Managed futures outperform the other asset classes, returning almost 70 times the original investment in January 1980. No other asset class presents itself as a viable inflation hedge. ”

To have a truly effective inflation hedge, investors should consider a meaningful allocation to one or more CTA/Managed Futures investments with substantial exposure to commodity prices and allow a greater tolerance for short-term volatility of returns.[4]

The first whiffs of either


They will also do well to differentiate between CTAs[5] who, in their attempts to keep volatility low are becoming increasingly correlated with the traditional investment markets, and those that keep appropriate exposure to the commodities markets even in times of higher volatility.[6] For qualified investors, a customized solution should be possible to arrange through individual managed account mandates.

The post Bretton

Time to hedge is before inflation hits the headlines

Because high inflations tend to have a sudden onset, an inflation hedge should be put in place in advance of inflation’s acceleration. Carmen Reinhart and Kenneth Rogoff warn investors that, “Waiting for markets to signal a problem may be waiting too long because governments have the ability to suppress market signals.”[7] Lulled into inaction by rosy statistics, investors risk acting too late.

A few inflation history lessons should be heeded: [8]

“In World War I, an early version of what we would call the CPI-U, the consumer price index for urban areas, went from 1% for 1915 to 7% in 1916 to 17% in 1917… How did it happen? The Treasury spent like crazy on the war, creating money to pay for it…”

“In 1945, all seemed well: inflation was 2%, at least officially. Within two years that level hit 14%.”

“All Appeared calm in 1972, too, before inflation jumped to 11% in 1974 and stayed high for the rest of the decade … The thing about inflation is that it accelerates.”

The wait and see approach could prove costly…

Our psychology predisposes us to expect that future will resemble the recent past. Few statements strike me as more relevant to the problem of managing uncertainty and risk. More than thirty years of low inflation instilled among investors a sense of complacency about this risk even while they’re generally aware of it. Investors should not be complacent about inflation – it is too serious a risk.


All money


[1] Fischer, S. “Modern Hyper- and High Inflations,” National Bureau of Economic Research Working Paper No. 8930

[2] Inflation beta quantifies the average impact from an increase in the inflation rate on an asset’s total return.

[3]Assessing Managed Futures as an Inflation Hedge within a Multi-Asset Framework,” by J. Twomey, J. Foran and C. Brosnan, Journal of Wealth Management (Winter 2011).

[4] To offset a 50% loss of purchasing power over a 5-year period would require a 100% nominal performance over the same time. That entails about 15% compound annual return – a rate that entails commensurate risk.

[5] Compared to other financial markets, commodity futures markets are relatively small. For the very largest, multi-billion dollar CTAs, it has become extremely difficult to keep a meaningful exposure in commodity markets. For example, one large CTA concentrates over 70% of their risk in interest rate/treasury futures and less than 7% of risk in commodities.

[6] A good discussion on this subject is provided by IGS Alternative Solutions 2010 paper, “True CTAs: the promise of portfolio protection, delivered.” by David Flynn.

[7]Debt Overhangs: Past and Present,” C. and V. Reinhart, K. Rogoff, NBER Working Paper No. 18015 (April 2012)

[8] “Watch Bernanke’s ‘Little’ Inflation Capsize U.S.: Shales” by Amity Shales, Bloomberg View, 15 March 2012.


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