Most commodity hedge funds expected to ride out the credit storm

29 September 2008 | 06:21 Code : 18121 Geoscience events
Notoriously volatile commodity markets have seen even wilder swings than usual....

Notoriously volatile commodity markets have seen even wilder swings than usual over the last couple of weeks, scaring some investors who have been drawn to the surging markets over the last few years.The volatility has saddled some hedge funds with billions of dollars in total losses, and even put one big commodities fund out of business. But other hardened commodities investors say the volatility presents as much reward as risk.With the ballooning credit crisis forcing investors in any market to be more protective of capital, commodities face a cash crunch not very different from that facing equities and other asset classes. Sudden market gyrations that threaten to crush wrong-footed investors also can deter participation.Still, industry data shows funds focused on raw materials -- or those that at least have commodities in their portfolios -- have weathered the credit crisis better than those involved primarily in equities and other non-commodity assets."Certainly volatility increases the level of risk but it also increases the opportunity for those who are correct in the trend and direction of their exposure," said Kenneth Heinz, president of the Chicago-based Hedge Fund Research.Latest HFR data shows that hedge funds employing Macro (Total) and Macro (Systematic Diversified) strategies -- which include exposure to commodities -- returned 7.19 percent and 2.65 percent year-to-date, becoming the second and third-best performers in the industry.In comparison, funds using the Equity Hedge (Total) strategy were down 8.37 percent, while funds using the Equity (Market Neutral) strategy were down 0.07 percent.Investors in energy markets were stumped this week when the expiring October front-month contract in U.S. crude oil surged a whopping $25 -- or 24 percent -- during Monday’s session to touch $130 a barrel -- a level not seen almost two months. The market eventually closed up 15 percent at above $120 a barrel.Traders said the price blitz was an anomaly caused by a sudden squeeze on investors "short" on oil -- those who had been betting on prices to fall further and had to cover suddenly when the market turned against them.Just a week ago, U.S. crude fell to just over $90 a barrel -- far below a July record high of around $147 -- as the credit crisis swallowed up U.S. investment banks Lehman Brothers and Merrill Lynch and caused a government takeover of insurance titan AIG A similar situation occurred in U.S. soybeans on Sept 12 when the expiring September contract soared 22.5 percent as traders paid through the nose to cover shorts.Such market turns can be overwhelming even for veterans in commodities, said those familiar with the business."It’s a very, very difficult market now to invest," said Charles Gradante, who invests in hedge funds as a principal at Hennessee Group,"It’s not an investors’ market. It’s a traders’ market. You have to have very tight stop losses on your trades," he said.Gradante, however, thinks most commodity-based hedge funds will ride out the credit storm. "I think there will be some hedge funds that will get caught in this undercurrent of volatility in the commodity markets," he said. "But I don’t see a systemic problem. I don’t see massive dumping or many hedge funds going under because of the volatility."This year so far, the biggest casualty among commodity hedge funds has been Ospraie Management, which had to close its flagship $2.8 billion commodities fund in August after losing 27 percent on energy, mining and natural resource stocks.In July, U.S. energy trader SemGroup LP collapsed after making $3.2 billion in bad bets on oil prices. Earlier in February, MF Global, the world’s largest commodity futures brokerage, lost $142 million from unauthorized trading by an employee in the Chicago wheat market.With oil down more than 25 percent from this year’s peak, other commodity prices are down too, dragging down the value of investments tied to commodity index futures.Eliot Geller, managing director and global head of commodity indexes at Jefferies Financial Products, co-owner of the Reuters-Jefferies CRB Index, thinks net commodity index investments are down $40-$50 billion from an official June estimate of $200 billion."At the same time, I haven’t heard anyone who has shifted opinion on .... commodities, in terms of recognizing the core benefits" of the asset class, he said. (Editing by David Gregorio)

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