* Some big-name funds in second year of losses
* Investors pulling money
* Fortress, veteran managers closing funds
* Fall in volatility catches managers out
By Tommy Wilkes and Eric Onstad
LONDON, May 11 (Reuters) – Investors in some of the
best-known commodity hedge funds are getting increasingly
frustrated by their performance, with some heading for the exit
as managers rack up a second year of losses.
Some major funds focused on energy, metals and agricultural
products have fallen this year after traders – still cautious
about big bets following last year’s losses – sought to protect
themselves against rising volatility just as it fell.
Clive Capital, the $3.4 billion London-based fund run by
Chris Levett, and Armajaro, one of the largest players in the
coffee and cocoa markets, are among those in the red.
Meanwhile, Fortress Investment Group’s commodities
fund, run by William Callanan, this week became the year’s third
big-name commodity fund to close after it racked up double-digit
losses and lost half its assets..
“The multi-billion funds have really been nothing but
disappointing over the last couple of years,” said one investor,
asking not to be named. “For people that only came in when the
noise about commodities started a couple of years ago, they (the
funds) have basically done nothing.”
Commodity managers who forged reputations for eye-catching
returns as they rode the long commodity bull run that started
some 10 years ago are now struggling with shorter, more
uncertain trends.
Aside from Fortress, two of the sector’s biggest names also
decided to liquidate their funds earlier this year, underlining
how tough commodity markets have become for even veteran
traders.
Legendary natural gas trader John Arnold is closing down his
flagship Centaurus fund after two years of struggling to
maintain outsized returns, while oil fund BlueGold – famed for
its 200 percent gain in 2008 – is shutting after racking up 35
percent losses last year.
STRUGGLING WITH VOLATILITY
For a sector renowned for managers’ ability to navigate
volatility, many struggled to get to grips with falls this year.
Some funds came into the year predicting rising volatility
in oil prices on the back of escalating tensions around Iran and
its nuclear ambitions. Brent crude oil gained about 15
percent early in 2012 but has given up most of its rise.
“The fall in commodity volatility has cost managers over the
year. A lot of people bought call options on oil but implied
volatility has fallen substantially over the past few months,”
Jaspal Phull, a portfolio manager at Stenham Asset Management
and responsible for investing in commodity funds, said.
“There is definitely a sense that … managers need to
produce returns this year after what was a disappointing 2011.”
Metal prices have also hurt funds. Key industrial metal
copper, for example, has remained range-bound after
gaining around 15 percent early in the year.
“I think people have been trading a lot of options, not only
in metals, expecting volatility to increase, but it just hasn’t,
it’s been very flat … People have lost a lot of money trying
to trade volatility, it’s not pretty,” said a market source,
asking not to be named.
Big-name losers include Callanan at Fortress. His fund,
which is now returning money to investors, lost 12.6 percent
this year to the end of April after falling 8 percent last year.
The $860 million Krom River Commodity Fund has given up 3.6
percent after a 4 percent drop in 2011, while Clive Capital, a
big player in oil markets, is down 4.4 percent, compounding last
year’s 9.9 percent slide, figures seen by Reuters show.
Meanwhile, commodities giant Armajaro, co-founded by cocoa
trader Anthony Ward, saw its flagship fund fall 1.6 percent in
the first quarter and its computer-driven fund shed 10 percent,
according to figures seen by Reuters.
The average commodity fund has fared only slightly better.
Funds focused on energy or basic materials are up 2.15 percent
to early May, but this is less than half the 4.42 percent rise
of the average fund, according to Hedge Fund Research.
Not all funds are in their second year of losses, however.
Mike Coleman’s Merchant Commodity Fund has rebounded after a
slide in 2011. The portfolio has gained 11 percent up to the end
of April after falling 30.1 percent last year.
HEADING FOR THE EXIT
Poor performance is encouraging some investors to sell.
Many who poured into commodity funds after the financial
crisis, wanting to diversify away from stock and bond markets
ravaged by volatility, will have missed out on the boom years –
epitomised by BlueGold’s 200 percent gain in 2008.
Assets in Callanan’s fund slid 46 percent to $473 million
during the first quarter, a company filing showed. The fund,
which ceases trading around May 23, ran $1.2 billion last June.
One investor in Clive and Armajaro, asking not to be named,
said it was considering cutting its holdings as it now preferred
to invest in smaller, nimbler managers.
Clive and Armajaro declined to comment.
“Everyone’s had quite a lot of investors pulling money out
and that causes a lot of rebalancing issues. They’re pulling out
for a number of reasons, not just outright performance, maybe a
different strategy is being employed,” the market source said.
The worry now is that commodity markets are set to suffer
renewed volatility, driven by geopolitical concerns in energy
markets and weaker growth in China, the world’s biggest consumer
of raw materials, making it even tougher for managers to trade.
Gabriel Garcin, portfolio manager at Paris-based Europanel
Research & Alternative Asset Management, has shied away from
investing in pure commodity hedge funds partly due to the
relatively small markets in which they invest.
“The Chinese slowdown is also adding to the asymmetry of
returns in commodities. You have these two parameters that could
create a lot of volatility and a very tough environment for
traders,” he said.
