Bloomberg News

Hedge Funds Hurt in May Commodity Rout

June 20, 2012

Hedge Funds Bruised in Third May Commodity Rout as Galena Falls

A security guard stands outside 55 Baker Street, the building housing the offices of Brevan Howard Asset Management LP, in London. The Brevan Howard commodities fund, run by Stephane Nicolas in Geneva, is still up 4.2 percent in the first five months. Photographer: Chris Ratcliffe/Bloomberg

For the third straight year, May proved a disaster for hedge funds that specialize in commodities as raw materials from copper to oil fell into bear markets.

Funds tracked by the Newedge Commodity Trading Index lost an average 3 percent last month, the most since September. Taylor Woods Master Fund Ltd., managing more than $1 billion, retreated 4.2 percent, according to a monthly report obtained by Bloomberg News. Galena Asset Management Ltd.’s metals fund dropped 2.6 percent in May, according to the company, and Brevan Howard Commodities Strategies Master Fund Ltd. fell 2 percent, according to a monthly report to investors obtained by Bloomberg.

The declines show that even the most lucrative traders failed to prosper as the Standard & Poor’s GSCI Spot Index of 24 raw materials had its biggest drop since November 2008 and stocks retreated the most in eight months. Last month’s losses were worse than last year’s 1.4 percent slide in the 75-member Newedge index during May and the 2010’s 2.8 percent decline.

“This is the third year that we’ve seen it start quite optimistically and then serve up disappointment in May,” Fraser McKenzie, head of research at 47 Degrees North Capital Management Ltd., which invests in hedge funds, said in a phone interview from Pfaeffikon, Switzerland, on June 12. “It’s almost uncanny.”

The Brevan Howard commodities fund, run by Stephane Nicolas in Geneva, is still up 4.2 percent in the first five months. The fund managed $534 million as of April 30. Peregrine Communications Ltd., Brevan Howard’s public-relations company, declined to comment.

$4.4 Billion

Last month’s loss for the Galena metals fund, run by Duncan Neil Letchford, trimmed its year-to-date return to 3.1 percent, according to Galena Asset Management, the London-based unit of Trafigura Group. It managed $817 million as of April 30.

The $4.4 billion Astenbeck Capital Management LLC fund slid 14 percent in May, according to an investor in the fund. Astenbeck, based in Westport, Connecticut, declined to comment on the returns. The fund’s slide was reported earlier by Reuters.

Clive Capital LLP and Vector Commodity Management LLP were among funds that emerged as winners from the rout, while Krom River Commodity Fund Inc., managed by Baar, Switzerland-based Chris Brodie, avoided losses by cutting wagers on higher prices.

The $3.3 billion Clive fund, run by Chris Levett, rose 10 percent partly as it bet energy prices would fall, according to two people with knowledge of the matter. It fell 10 percent last year before recovering 5 percent in the five months through May. An executive at Clive in London declined to comment.

Ex-Goldman Trader

The Vector Commodity fund, overseen by London-based Gilbert Saiz, a former Goldman Sachs Group Inc. trader, rose 7 percent in May, two people familiar with the fund said. It gained 9.5 percent in the first five months. A person answering the phone at Vector’s office said Saiz wasn’t available and the firm didn’t want to comment.

“In May, the performance dispersion of commodity hedge funds we follow was quite intense,” Marcus Storr, head of hedge funds at Feri Trust GmbH in Bad Homburg, Germany, which manages about $20 billion, said in a telephone interview. “There were managers up big time and down big time.”

Krom, with assets of $790 million, dropped 0.1 percent after cutting bullish wagers on gold. The precious metal, which rallied for 11 consecutive years as investors sought a store of value amid declines in the dollar, retreated 6.3 percent in May.

“We got very defensive on commodities,” Itay Simkin, chief executive officer of Krom River Trading AG, said in a June 12 phone interview from Baar.

“We were short metals, had puts on energy, and got out of gold,” Simkin said. “Unfortunately we weren’t brave enough to be big short, because volatility is very high at the moment.”

Bear Market

May’s price swings in the S&P GSCI Index were the widest since August, according to data compiled by Bloomberg. Crude oil on the New York Mercantile Exchange fell 17 percent, closing the month more than 20 percent below this year’s peak, the definition of a bear market.

Crude slumped because of concern the European debt crisis may spread and slower growth in China, rather than the fuel’s demand and supply fundamentals, Beau Taylor, chief investment officer at Taylor Woods Capital Management LLC in Greenwich, Connecticut, wrote in the report.

Stocks Tumble

“Significant potential exists for the markets to shift the focus back to the micro-level supply and demand fundamentals and away from the focus on macroeconomic uncertainty,” he said. Most of the May loss at the Taylor Woods Master Fund came from energy, according to the report to investors.

West Texas Intermediate futures were little changed at $83.93 a barrel as of 5:38 p.m. Singapore time, losing 3.1 percent this month and 15 percent this year.

The performance of commodity managers mirrors that of hedge funds as a whole, which dropped 2.9 percent in May, according to data compiled by Bloomberg, as stocks tumbled amid concern Greece will abandon the euro.

Returns among commodity funds are similar because managers are responding to the same economic and political concerns whatever they invest in, Storr said.

Dwight Anderson’s Ospraie Management LLC’s commodities fund fell 2 percent in May, paring this year’s advance to 3 percent, a person familiar with its performance said, asking not to be identified because the matter is private. Jonathan Gasthalter, a spokesman for Ospraie in New York, declined to comment.

`Fundamental Stories'

Krom is waiting for supply and demand to reassert themselves on commodity prices before taking larger positions, Simkin said.

“We see a lot of opportunities,” he said. “Prices are falling to much lower levels and there are some very good fundamental stories in grains and softs. We want to see the fundamental picture and the technical picture aligned, which they’re not at the moment.”

Commodities rallied on June 14 and 15 on speculation central banks will respond to the European crisis with some coordinated action. The GSCI index surged 84 percent in the three years from January 2009 as central banks including, the U.S. Federal Reserve, the Bank of England and the Bank of Japan (8301) pumped trillions of dollars into the financial system to revive the global economy.

“Our macro analysis is still pointing to continued weakness in the global environment lasting for the next few months,” said Lionel Semonin, manager of the Earth Element Fund in Singapore.

Four Elements Capital Pte Ltd.’s $15.9 million hedge fund gained 7.6 percent last month, the most since its 2008 inception, as bets on falling energy prices came good.

“We believe that governments would have to inject more stimulus,” he said. “This effort is probably going to have a positive effect on precious metals, particularly gold.”

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net


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