Oct. 10 (Bloomberg) -- Merchant Commodity Fund, the hedge fund run by former Cargill Inc. traders Michael Coleman and Doug King, gained 12 percent in September as energy and agricultural prices slumped, two people with knowledge of its performance said.

The $2 billion Singapore-based fund beat Eurekahedge's CTA/Managed Futures Hedge Fund Index, which edged up 0.41 percent last month, according to preliminary data. Hedge funds worldwide lost 4.7 percent in September, the biggest monthly drop since the collapse of Long-Term Capital Management LP a decade ago, according to Hedge Fund Research Inc. in Chicago.

Commodity prices in September fell 11.8 percent, the biggest monthly decline since at least 1956, as measured by the Reuters-Jefferies CRB Index. Rising inventories and slumping demand sent contracts from natural gas to corn tumbling, heralding the end of a six-year commodity boom.

Merchant and other commodity traders ``have made money. The ones that have done very well have been short agricultural commodities, short equities,'' said Aoifinn Devitt, founder of Clontarf Capital, a London-based consulting firm that tracks about 20 commodity hedge funds. ``Any trend-following strategy has been very successful in the past month.''

Paul Touradji, the commodities trader who warned in March that commodity markets might collapse, said his main fund returned 12.7 percent in the second half through Oct. 7. Touradji Capital Management LP's Global Resources Fund returned 6.1 percent in July and August, and 0.1 percent last month, Touradji, 37, said yesterday in London.

Boom to Bust

The CRB index more than doubled from 2001 to a record 473.97 on July 3, underpinned by China's economic growth and the resulting demand for oil, copper and other raw materials.

It has since dropped 34 percent as the credit-market seizure that led to Lehman Brothers Holdings Inc.'s bankruptcy and Merrill Lynch & Co.'s forced sale squeezes speculators who helped lift commodities to record and slows expansion in the U.S., China and India.

As the commodities boom went bust, hedge funds were hurt by bad bets in the market. Boone Pickens, the billionaire founder of BP Capital LLC, last month said 15 percent of his hedge funds' holders asked for the option to withdraw their money after he lost more than $1 billion on energy trades this year.

Ospraie Management LLC, once the world's largest hedge fund dedicated to natural resources, on Sept. 2 told investors the New York-based firm would close its largest pool after slumping 38.6 percent for the year.

`Protect Capital'

``Investors are looking for somebody who can protect capital in a difficult market,'' said London-based Nicholas Paris, managing partner of Purbeck Advisers LLP, who markets Asian hedge funds to European investors. ``Unfortunately, it's proven difficult for a lot of funds; a lot of them have posted losses this year. Anybody who's making positive returns is well sought after.''

Gains in September boosted the Merchant fund's performance to 9.55 percent this year, almost double the 5.25 percent advance in the first five months of the year, said the people briefed on the fund's performance, who asked not to be identified because details are private.

Still, the hedge fund trailed the 10.3 percent 2008 gain in the CTA/Managed Futures index compiled by Singapore-based data provider Eurekahedge. The Merchant fund's gain this year is also almost a fifth of the 47 percent it returned in 2006.

Coleman, managing director of Singapore-based Aisling Analytics Pte that manages the Merchant fund, declined to comment. The fund, which he launched with $10 million in June 2004, trades in grains, vegetable oils, coffee, sugar and rubber as well as energy products.

Exploit Discrepancies

Coleman, 47, and King, 41, use a mix of relative value strategies, which exploit discrepancies between commodities, markets, delivery dates and locations, and so-called directional trading, or betting on prices rising or falling.

About 450 commodity hedge funds held $80 billion of assets as of Sept. 1, up from $55 billion last year, said Brad Cole, president of Cole Partners Asset Management in Chicago, as hedge funds helped fuel the commodities rally.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices, and participate substantially in profits from money invested.

To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net.

Last Updated: October 9, 2008 22:50 EDT