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How This Legendary Investor Is Playing QE2

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"Our extraordinary times offer extraordinary opportunities, but as with most opportunities, there will be winners and losers." So begins legendary macro investor Paul Tudor Jones ' October investor letter. Jones runs Tudor Investments, one of the largest macro hedge funds in the world, where he makes top-down bets about how markets will move. In his letter, he sets out what he believes is going to happen to the markets as a result of the Federal Reserve's second round of quantitative easing, aka QE2. He then lays out how he is going to play that trend.

What's QE2?
QE2 is the Fed's program to put more money in the economy. It's doing this by buying $600 billion worth of Treasuries from investors over the next eight months. This extra money is then floating around the economy and can be used to invest in other assets. For a more in-depth explanation, click here.

Jones worries that the Fed is addressing the symptoms of our economic problem while ignoring the structural issues causing the problem, namely an artificially weakened Chinese yuan that makes exported Chinese goods cheaper than American goods. That said, the U.S. is choosing to treat the symptoms by pumping money into the U.S. economy.

How can you make money from this?

The opportunity QE2 provides
Jones believes the current situation is akin to 1999, when the fear of the Y2K computer disaster led central banks to pump liquidity into the market to compensate for any possible global communication and banking system failures. Most of that excess liquidity ended up in a very narrow list of markets that were the winners from the past nine months. The winners continued to outperform, and the losers continued to underperform. According to Jones, in 1999, "half of the winners in the first nine months made it into the top 10 list of the last quarter, and 70% of the losers in the first three quarters found themselves among the 10 worst performers of the fourth quarter."

The winners
Jones now thinks a similar situation will happen as the Fed pumps in $600 billion of quantitative easing. The opportunity then lies in the top-performing asset classes from the first three quarters.

So which asset classes were top performers for Q1-Q3 of 2010? I list the top asset classes below, as well as ETFs and trusts that represent them, and stocks you can use to play this trend. The top-performing asset classes of Q1-Q3 2010:


Performance Q1-Q3

Can Be Represented by

Stocks to Play This Trend

Silver 28.6% iShares Silver Trust (NYSE: SLV  ) Silver Wheaton (NYSE: SLW  )
Emerging markets consumer basket 21.9%  Dow Jones Emerging Markets Consumer Titans Index Fund (ECON) (Nasdaq: CTRP  )
U.S. bonds 18.7% iShares Barclays 7-10 Year Treasury (NYSE: IEF  ) N/A
Gold 18.7% SPDR Gold Trust (NYSE: GLD  ) Rubicon Minerals (NYSE: RBY  )
India Nifty 50 15.9% iShares S&P India Nifty 50 Index ICICI (NYSE: IBN  )
Yen (trade-weighted) 12.7% CurrencyShares Japanese Yen Trust (FXY) N/A
Gilts 12.3% N/A N/A
Bunds 11.2% N/A N/A
Wheat 11.2% N/A N/A
Krone (trade-weighted) 10.3% N/A N/A

Source: Reuters.

I don't advocate momentum investing, but Paul Tudor Jones' track record shows these are definitely worth a further look. For some opportunities that may better fit your investing style, click here to get our free report: 5 Stocks The Motley Fool Owns -- and You Should, Too.

Dan Dzombak recommends you read The Best Investment Advice You Will Ever Get if You Have Under $100k. He does not own shares in any of the companies mentioned. His musings and articles he finds interesting can be found on his Twitter account: @DanDzombak. International is a Motley Fool Hidden Gems selection. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. 

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