Global Investing

Commodities hedge funds feel the heat

September 4, 2008

rtx7ukh.jpgThe heat is on for hedge funds with commodities bets.

Earlier this week Ospraie Management told investors it is shutting its flagship fund after it plunged 27 percent in August. The fund’s energy and commodities stock positions fell as investors worried if a global economic slowdown will mean less demand for resources.

And now RAB Capital’s Philip Richards is giving up the CEO role to focus on his funds after an awful period of performance for his once high-flying Special Situations fund.

Losses on small-cap mining stocks, as well as its high-profile error in buying into troubled bank Northern Rock, meant its listed feeder fund fell 38.1 percent from the start of the year to Aug. 21.

One of the potential danger areas for hedge funds in this area is liquidity – how quickly they can dump stocks when investors decide enough is enough and want to pull their cash out.

The problem is that during the commodities boom of the last five years the flood of investor money has encouraged some funds to invest in less crowded areas such as smaller companies. These are easy to trade in a bull market but buyers can quickly disappear in a downturn.

Ospraie has told investors it will give investors their money back in stages, with the least liquid 20 percent taking up to three years to be returned.

Given the size of recent losses in this area, the illiquidity of some hedge funds’ positions and investors’ increasing nervousness as hedge funds continue to struggle, there are likely to be more such closures.

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