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Hyperinflation threat
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On the Origin of Facts

There are plenty of reasons to be worried about the risk of inflation. No wonder "Black Swan" author Nassim Nicholas Taleb and Universa Investments' Mark Spitznagel are launching a new fund to bet on it. They're looking to gamble on likely inflation winners, like commodities and perhaps gold, and against the most likely loser -- Treasury bonds. (Bonds fall when inflation and interest rates rise.)

Minimum investment? Around $25 million.

If you don't have that kind of money to hand over to a hedge fund manager, what are your options for protecting your porfolio against inflation?

Be wary of trying to pull off complex strategies yourself. For an individual they are usually high risk and high cost, and they are probably not worth the effort.

Sure, you could use the futures market to bet on rising gold and falling Treasurys. But futures are incredibly risky. When people lose their shirts, the futures market is usually where it happens.

Options are slightly better, because you can easily limit your potential losses. You can put down a small stake to make a bet on gold or interest rates. Even if it goes wrong, all you can lose is that small stake. But Peter Barker, director of interest rate products at derivatives exchange CME Group, explains the problem: The options market only trades contracts about 18 months to two years into the future, so hyperinflation needs to hit fast for an options strategy to pay out.

"Rolling" old option contracts into new ones as they become available is a partial solution. But it's costly, time-consuming and tedious. That's not investing, that's work.

What are the real-life choices available for normal people?

1. A managed gold fund like, say, Tocqueville Gold or U.S. Global Investors Inc. World Precious Minerals. Gold, other metals and mining stocks should do well in hyperinflation. This is a lower-risk alternative to buying gold directly, since the metal itself can be volatile.

2. A mutual fund that bets on long-term interest rates rising. The two best known are ProFunds ' Rising Rates Opportunity fund and Rydex Inverse Government Long Bond Strategy fund. Be aware, though, these are double-edged. If rates fall, so will the fund. These funds have already risen a long way since long-term rates bottomed out last winter.

3. An absolute return fund that can use derivatives and aims to beat inflation. An example: MFS Diversified Target Return, which aims to beat inflation over 5% a year over a market cycle. The problem: There are no guarantees. Many of these funds are new and the track record is too short to judge. (For more on these funds, read this recent column.)

4. Don't neglect the simple and obvious. If you are worried about inflation, for heaven's sake refinance your house into a new 30-year fixed mortgage immediately. Rates currently average 5.32%, says Bankrate.com. If inflation surges that will, too. In 1979 they hit 18%. (Of course, as I wrote earlier this week, a refi might not be easy if you're not locked in.)

5. Sell any long-term bonds, too. A bond guaranteeing 7% a year for 30 years won't be worth much if inflation hits 10% and CDs starting paying 11%. Treasury bonds have sold off sharply, but corporates haven't. The yield gap between long-term investment grade corporates and 30-year Treasurys, which was nearly 5% in mid-January, has fallen to 3.5%.

6. If you want guarantees, at the risk of trying readers' patience, inflation-protected Treasury bonds, or TIPS, pay interest adjusted for inflation. Right now the 20-year TIPS yields about 2.4% over inflation. It's OK. TIPS should be kept in tax shelter like an IRA.

Write to Brett Arends at brett.arends@wsj.com

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