Commodity Hedge Fund Ospraie Shuts Down After Losses

By: Mike Shedlock | Wed, Sep 3, 2008
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The Guardian is reporting Ospraie fund to close after August hit.

Hedge fund manager Ospraie Management LLC will close its flagship fund after it plunged 27 percent in August on losses in energy, mining and natural resources equity holdings, in one of the biggest ever closures of a commodities-focused hedge fund.

The closure of the fund, announced by the firms founder Dwight Anderson in a letter to investors on Tuesday, could be more bad news for Lehman Brothers Holdings Inc, which took a 20 percent stake in the hedge fund manager in 2005.

"I think it's probably the first of more hedge fund closings to come, given that a significant majority of hedge funds have had negative performance this year," said Chris Orndorff, head of equity strategy at Payden & Rygel in Los Angeles.

Another Amaranth

Bloomberg reports Ospraie May Be Latest Victim of Natural Gas Swings.

Ospraie Management LLC may be the latest casualty from price swings in natural gas, the commodity responsible for the $1.9 trillion hedge-fund industry's biggest blowup with Amaranth Advisors LLC.

New York-based Ospraie told investors yesterday it will close its biggest hedge fund after losing 38.6 percent this year on bad bets on commodity stocks. Holdings in natural gas-related companies made up almost a fifth of Ospraie's investments at the end of June, before the commodity's price dropped 41 percent.

Amaranth, MotherRock

Amaranth collapsed in 2006 after $6.6 billion of losses on wrong-way bets on natural gas. MotherRock LP, a $400 million fund founded by former New York Mercantile Exchange Inc. president Robert "Bo" Collins, also folded that year after bets on the commodity soured.

"I am extremely disappointed with this result and the fund's sudden reversal in performance," Anderson, 41, said in a letter to investors yesterday. "After nine years of striving to be a good steward of your capital, I am very sorry for this outcome."

Ospraie plans to return 40 percent of the fund's assets to investors by the end of September and another 40 percent by year- end, Anderson said in the letter. The remainder, mostly held in so-called illiquid investments, may take as long as three years to distribute, he said.

Those burned by gas aren't limited to hedge funds. Bank of Montreal said in March it had C$1.56 billion ($1.47 billion) in pretax losses from bad bets on natural gas contracts and debt writedowns.

Leverage Continues To Unwind

Across the board, leverage continues to unwind. This is supportive of the idea that speculators played a bigger role in commodity prices than some have presumed. From a fundamental standpoint, the global economy is slowing at a rapid pace. Even China is rapidly slowing as noted in China's Manufacturing Contracts for Second Month.

Some attribute the China slowdown to shutting of factories ahead of the Olympics. I disagree. If a 2-3 week slowdown was all there was to the China slowdown story then the Chinese stock market would not have collapsed in half and China would not be announcing a stimulus package.

When it comes to hedge funds, I think the major shakeout is still coming. And as with Ospraie, those wanting out are going to find it easier said than done. Eventually illiquidity and leverage come back to haunt every time.

 


 

Mike Shedlock

Author: Mike Shedlock

Mike Shedlock / Mish
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Mike Shedlock

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility.

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