NEW YORK (Dow Jones)--Hedge funds that trade commodities are warily sensing opportunities.
A number of managers are wading deeper into commodities - a surprising move given that the hedge-fund industry has just wrapped up one of its toughest years on record and raw materials prices are plumbing lows.
Commodity boosters argue the futures contracts they trade on regulated exchanges are transparent and easy to convert into cash, two attractions for investors trapped in more opaque asset classes. A number of funds did well despite commodity markets' crazy swings last year, especially those using a strategy known as managed futures.
BlueGold Capital Management, a London-based hedge fund that trades oil derivatives, returned 209% in 2008, said CEO Dennis Crema. The $1.1 billion fund is reopening to new investors Feb. 1.
Galena Asset Management, a subsidiary of Dutch commodity trading firm Trafigura Group that manages about $600 million, is planning to add an energy fund to its suite of funds, the firm said. Galena's metals fund had gained about 22% last year, while a "special situations" fund that invests in mining and energy projects declined 31%.
Touradji Capital Management, Paul Touradji's commodity-focused firm with about $3.5 billion in assets under management, is planning to launch a "global macro" fund that would trade broadly across markets, expanding the firm's investment horizon, a person familiar with its operations said. Touradji's flagship commodities fund returned about 13% net of fees in 2008.
Institutional investors such as pension funds that invested in commodities through indexes that passively track prices were burned last year as prices fell. In theory commodities shouldn't move in lockstep with stock markets, but in 2008 both plunged.
Supporters of more active commodity trading say this adds to its appeal. "People see the prices of commodities go down by these huge percentages and think the game is over and that everyone is wiped out. This is not the case," said Brad Cole, president of Cole Partners Asset Management in Chicago, which is raising $500 million for a new commodity fund.
Cole said he regularly fields inquiries from fund managers seeking to be part of the firm's commodities focused funds of hedge funds. "The number of calls we've received from managers that are in this game has increased dramatically in the last 90 days," he said.
Risk Remains
For investors seeking steady returns, commodities are a risky place. After peaking earlier in the year, the Dow Jones-AIG Commodity Index fell 37% in 2008 as constituents from crude oil to silver to sugar fell by double-digit percentages. The number of contracts open on major futures exchanges has tumbled by more than a fifth in the past year as traders, including hedge funds, raised cash, fled risk and faced tighter credit conditions.
"This was one of the worst years in the history of organized commodity markets," said Arturo Rodriguez, chief investment officer of Juno Mother Earth Asset Management, whose commodity futures fund was up more than 16% last year. "It was not only the violent change in direction, but also the extreme volatility. It's proved to be a very big challenge for any participant."
Indeed, Ospraie Management, run by Dwight Anderson, is in the process of dissolving its flagship hedge fund after stock holdings in energy, mining and resources stocks sank last year. It still has about $3.5 billion under management in other funds, a person with knowledge of the firm said.
T. Boone Pickens's BP Capital converted its equity fund to cash last year after steep declines and on expectations of investor withdrawals.
Citadel Investment Group, the hedge-fund giant run by Kenneth Griffin, wound down its power trading operation late last year, but continues to trade oil and natural gas. Citadel's main funds fell about 53% last year, forcing the firm to bar investors from redeeming money.
Amid widespread redemptions, fundraising remains a headache for hedge funds. "The environment for raising money has been difficult for the last six months. We're taking it a day at a time," said BlueGold's Crema.
Waves of hedge fund withdrawals also helped drive commodity prices lower last year. But "there are signs that redemption-related selling and deleveraging have peaked," Morgan Stanley commodities analyst Hussein Allidina said in a recent report.
Managed Futures
A commodity-fund subset that typically chase price trends in commodity and other futures outperformed most other hedge fund categories last year. So-called "managed futures" funds were up nearly 14% last year, according to preliminary estimates from BarclayHedge Ltd., while hedge funds as a whole posted negative returns of 20%.
Standouts among large managed futures operations through late 2008 include BlueCrest Capital Management's BlueTrend fund, which returned 43%; Man Group PLC's AHL Diversified fund, which was up about 20%; and Winton Capital Management's Winton Futures Fund, which was up 22%, according to investors.
Among the disappointments was a new futures funds run by James Simons's Renaissance Technologies LLC, which has waived management fees for 2009 after a 12% decline last year, the Wall Street Journal reported.
After getting burned by restrictions on withdrawals last year, "investors will be looking for a lot more transparency and liquidity. These are two things that managed futures has always provided," said Mick Swift, director of research at Abbey Capital, a Dublin-based firm that has more than $1 billion in client assets invested in 19 managed futures funds.
-By Gregory Meyer, Dow Jones Newswires; 201-938-4377; greg.meyer@dowjones.com
(Joseph Checkler in New York contributed to this report)