Tag Archives: downside

Commodities ravaged as traders flee risk

Times Online – Surging fears of Armageddon in the global financial system ravaged a wide selection of commodities across Asia as groups ranging from hedge funds to day traders spent the day in a headlong flight from risk.

The shock waves from the bankruptcy of Lehman Brothers reverberated through markets for vegetable oil, soy beans, rubber and industrial metals as confidence in the financial system faltered, global growth prospects dimmed and cash became king.

Broad baskets of commodities — once seen by speculators as a sure-fire bet because of China and India’s apparently unstoppable growth — were sold, with food and metals tracking the sharp declines in crude oil.

Dealing floors in Asia descended into mayhem as analysts forecast a period where commodity markets were effectively “frozen” by a sudden drought of fresh capital.

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Hedge Funds Raise Cash To Repay, Not Reinvest

Seeking Alpha – Some analysts say a big-picture trend presently unfolding involves hedge funds and other players unwinding bets on commodities/foreign currencies and plowing the proceeds into U.S. financial and other stocks. They are doing this for valuation reasons and as a haven against weakening economies overseas.

There is some evidence that it at least partly reflects hedge funds scrambling to raise cash to meet redemption requests. Financial stocks have risen for sure, but that likely reflects hedge funds buying back short positions to generate cash, not to go long because they think the fundamentals are turning.

I remain somewhat skeptical of the thesis that the U.S. economy is close to coming out of the downturn, and so the places to shift into are U.S. stocks and the U.S. dollar. When one looks at the problems the U.S. has, especially in its financial sector, they would seem to have the potential to inflict more pain on the economy than we have seen to date.

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Hedge fund’s Chanos-financials have seen the worst

Reuters – Hedge fund manager Jim Chanos, who makes money betting that companies’ stock prices will fall, said financial stocks have probably seen the worst and his fund has fewer short positions now than it did in the past.

"We have probably seen the worst in the financials," Chanos said on cable television channel CNBC. He also said that he has fewer short positions on financials now than he has had in the past, largely because much of the bad news is known about financial sector stocks.

Instead, Chanos, whose roughly $5 billion hedge fund Kynikos Associates often has between 40 and 60 short positions, said he is concentrating more on shorting some companies involved in the commodities area. "We would short companies that might depend on cement prices or steel prices going up," Chanos said, declining to reveal the companies he has shorted.

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Hedge Funds Gone Wild

CNBC – Hedge funds have more control over stock prices than market and business fundamentals, Cramer said yesterday during Wednesday’s show, but now it looks like at least two companies are fighting back.

Yesterday Cramer explained how massive hedge fund selling has been forcing down commodity-related stocks. It’s true that the fall of commodities themselves is partly to blame, but the rate of decline for the sector’s stocks has far outpaced that of oil, natural gas and other resources. So what’s going on? Investors in poorly performing hedge funds are demanding their money back, so the funds are dumping millions of shares into the open market to generate cash.

The trend has been enough to drive both investors in and CEOs of these commodity-related companies crazy. But today Joy Global cnbc_comboQuoteMove(‘popup_JOYG_ID0EZE15839609’);and CSX pulled a Howard Beale, declaring they’re mad as hell and they’re not going to take it anymore. cnbc_quoteComponent_init_getData(“CSX”,”WSODQ_COMPONENT_CSX_ID0EZBAC15839609″,”WSODQ”,”true”,”ID0EZBAC15839609″,”off”,”false”);

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Commodities bubble burns big investment funds

Miami Herald – The deflating commodities bubble is claiming its first casualties as large investment funds absorb staggering losses from bad bets that prices for oil, precious metals and grains would keep going up.

Hedge fund operator Ospraie Management LLC notified investors Tuesday that it’s closing its flagship fund after it suffered losses in August on positions in energy, mining and other natural resource-related stocks that left the fund down nearly 40 percent year-to-date. It’s believed to be the first hedge fund to go bust in this latest commodities boom as prices come crashing down after a historic bull-run earlier this year.

And the bloodletting may have only begun. Wall Street analysts say similar trouble looms for other funds that got caught up in the exuberance of the boom but were too late in getting out.

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Hedge funds caught out as Hurricane Gustav fails to lift oil price

Times Online – Several hedge funds face big financial losses after wrongly predicting that oil and gas prices would rise as a result of Hurricane Gustav slamming into the Gulf coast of the US earlier this week.

As Gustav swept towards New Orleans on Monday, catastrophe experts were predicting insured losses of up to $7 billion (£3.9 billion) as offshore oil rigs faced destruction and the storm threatened energy supplies.

Commodities hedge funds saw the glum prediction as an opportunity, betting heavily, using the futures market, that prices would surge in the wake of the hurricane chaos.

In New York, crude oil leapt to $116 a barrel in the hours before Gustav hit the US coastline. On Nymex, natural gas futures rose 45.3 cents to $8.278 per 1,000 cubic feet. However, the experts, and the hedge funds, were caught out. By the time the storm was sending water lapping over New Orleans’s flood barriers, Gustav had been downgraded by the National Hurricane Centre to a Category 1 event. Oil eased to $105.46, with dealers soon speculating that it would fall to $100.

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Big funds take dive as prices plummet

Myrtle Beach Online – The deflating commodities bubble is claiming its first casualties as large investment funds absorb staggering losses from bad bets that prices for oil, precious metals and grains would keep going up.

Hedge fund operator Ospraie Management LLC notified investors Tuesday that it’s closing its flagship fund after it suffered losses in August on positions in energy, mining and other natural resource-related stocks that left the fund down nearly 40 percent year-to-date. It’s believed to be the first hedge fund to go bust in this latest commodities boom as prices come crashing down after a historic bull-run earlier this year.

And the bloodletting may have only begun. Wall Street analysts say similar trouble looms for other funds that got caught up in the exuberance of the boom but were too late in getting out.

They say Ospraie’s misfortunes illustrate one of the hard lessons emerging from the commodities bubble: Many money managers have never been through a commodities boom and so were ill-prepared for the hyper-volatility associated with hard assets.

"You’re always going to have victims when a market comes down this fast. People stayed at the party for too long," said Phil Flynn, energy analyst at Alaron Trading Corp. in Chicago.

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New Gottex Fund Emulates University Endowments

HedgeFund.Net – Swiss funds-of-funds firm Gottex Fund Management is launching a fund that will emulate the investment principles of U.S. “super endowments.”

The new fund will emulate the investment principles of successful U.S. university endowment funds, such as Harvard and Princeton. It will allocate about 65% to alternative investments. The alternative part of the portfolio will cut across all asset classes: hedge funds, private equity, commodities, long-only equity, fixed income, real estate and other real assets.

Harvard Management, long the model for university endowment funds currently with about $35 billion in assets, increased more than 20% year over year in 2007.

William Landes is helming the new fund. Landes joined Gottex from Boston-based 2100 Capital, his hedge fund specialty firm that Old Mutual Asset Management bought in 2005. Before that Landes was a money manager at Putnam Investments, which helped incubate 2100 Capital.

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More to play for in hedge funds

Reuters UK – The hedge fund industry’s trade-of-the-moment — betting on falling financial stocks and rising commodities — is set to offer further profits, despite July’s setback, but managers may have to alter their tactics.

Hedge funds may well profit from betting July’s bounce in battered financial stocks and decline in commodities was only a blip in a longer-term trend, since the fundamental reasons for disliking bank stocks and holding commodities remain intact.

However, with investors nervously watching every piece of performance data, many funds have had to scale back the size of these bets to avoid further poor numbers — or are taking bets likely to be less painful if markets go against them.

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Citadel Investment Seeks $1 Billion for Global Macro Hedge Fund

Bloomberg – Citadel Investment Group LLC, the Chicago-based asset-management firm founded by Kenneth Griffin, is seeking about $1 billion for a new global macro hedge fund, according to a person with knowledge of the matter.

The fund is set to be managed in London by Kaveh Alamouti, 54, whom Citadel hired this year from New York-based Moore Capital Management LLC, according to the person, who asked not to be identified because the plans are private. Citadel oversees $20 billion.

Macro funds, which attempt to profit from broad economic trends by trading stocks, bonds, currencies and commodities, gained an average of 3.7 percent this year through July, according to data compiled by Chicago-based Hedge Fund Research Inc. All funds lost an average of 3.4 percent.

"Citadel is as good as they get,” said Tammer Kamel, president of Toronto-based Iluka Consulting Group Ltd., which advises clients on investing in hedge funds. “They have a reputation that will ease the current difficulties that hedge funds face in raising capital.”

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Nordic Commodity, ECM Post Top Power Hedge-Fund Gains

Bloomberg – Energy Capital Management and Nordic Commodity Funds AB’s hedge funds are outperforming the competition in European energy markets, where power prices fell as much as 17 percent last month from a record.

Energy Capital’s MMT fund returned 19.2 percent through July, according to a letter to investors, the best result in a Bloomberg survey of 11 funds in Europe’s electricity, coal, natural-gas and emissions markets. Alfakraft AB’s Alfa Energy Fund posted the biggest drop, at 17.9 percent, according to its Web site.

The plunge in power prices and related commodities since early July ended a four-year surge in electricity costs that enabled funds to provide better returns than stocks and bonds. Coal costs, which affect European power markets, more than doubled in the first half, before sliding 13 percent in July.

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Andor Hedge Fund to Liquidate

New York (HedgeCo.Net) – Greenwich-based Andor Capital Management will liquidate its $2 billion hedge fund after posting losses due to unfavorable market conditions, following in the footsteps of many failed hedge funds this year.   

Co-founder Daniel Benton announced the decision in a letter to investors this week while outlining a liquidation to start in October.

"My desire to devote more time to my family and other interests runs counter to the obligations of a hedge-fund manager who must be immersed in the markets in order to meet client expectations," Benton said in the letter.  He also stated that he will be retiring from managing outside capital after 24 years in the business.

In 2004, Andor made headlines when Benton split from Co-Founder Christopher James.  At that time, Andor held over $6 billion in assets and was just starting to experience turbulence after a period of enviable returns.

Benton, having been a technology investor at Pequot, built up high stakes in energy and commodities companies.  However, the volatility associated with these companies has not translated well for many hedge funds invested in those sectors.   

The hedge fund will continue to invest throughout August and September.   

Julie Scuderi
Senior Editor for HedgeCo.Net
Email: [email protected]

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