Oct. 26 (Bloomberg) -- Hedge fund managers are trailing benchmark commodity indexes by the widest margin in four years after copper doubled and oil surged 58 percent.

Touradji Capital Management LP, the second-biggest in commodities, earned 7 percent in its largest fund in the first nine months, according to an investor with knowledge of the result. Krom River Trading AG, which has $590 million, lost 8.1 percent in its raw materials fund. Commodity hedge funds lost 3.2 percent through September, according to Hedge Fund Research Inc. of Chicago. All lag behind the 12 percent gain in the S&P GSCI Enhanced Total Return Index.

Hedge fund managers, which traditionally charge 2 percent of the assets they oversee and keep 20 percent of profits they generate, are falling behind as $12 trillion in government spending to lift economies from the worst recession since World War II spurs demand for everything from sugar to lead. Goldman Sachs Group Inc. forecasts a 17.5 percent advance in the S&P index in 12 months, signaling that hedge fund managers may struggle again to keep pace.

Commodity price swings “overwhelmed most of the managers we follow,” said Dieter Kaiser, a director of investment management for Feri Institutional Advisers GmbH in Bad Homburg, Germany, which has allocated about $1 billion in alternative assets for clients. “Most of them are bullish in the long run, but for a couple of months now, they’ve been waiting for a correction that so far hasn’t happened.”

Touradji’s Result

A spokesman for Paul Touradji, 38, who manages about $2.7 billion, declined to comment on this year’s performance. The fund earned 8.6 percent last year. Touradji also manages a commodity index that returned about 48 percent this year, according to a person with knowledge of the company who declined to be identified by name.

The Krom River fund, started by Christopher Brodie in 2006, is up 3.2 percent this month, the company said in an e-mailed response to questions. It returned 37 percent last year.

Some 400 commodity hedge funds manage a combined $45 billion, according to Cole Partners Asset Management LLC. Hedge funds are mostly private pools of capital whose managers participate substantially in the profit from speculation on whether the price of assets will rise or fall.

The inability of managers to match gains in the underlying commodities isn’t limited to hedge funds. The exchange-traded U.S. Oil Fund returned 9.3 percent through September, while benchmark West Texas Intermediate futures surged 58 percent.

2005 Revisited

The last time that indexes and raw-material prices outpaced fund managers by this much was four years ago. From Jan. 31, 2005, the earliest that comparable data was available, the GSCI commodity index was up 44 percent through the end of September that year, beating the 16.1 percent profit in the HFR commodity hedge fund index.

Managers regained their edge in 2006, based on the HFR index. The S&P GSCI index returned only 1.7 percent in the first nine months of that year, when hedge funds earned 6.4 percent.

Stocks have been the best investment among the biggest asset classes this year, returning 22 percent through September, based on the MSCI World Index of equities in 23 developed countries. Treasuries lost 2.4 percent in the three quarters, according to Merrill Lynch & Co. indexes.

Oil rose as high as $82 a barrel this year after falling as low as $32.70 in January in New York, while copper advanced to as much as $6,728 on the London Metal Exchange today, a 13-month high, after starting at $3,025 a ton on Jan. 2.

Rising Volatility

Increasing price swings forced some managers to sell positions rather than stay in the market, hurting returns, according to Fraser McKenzie, the head of research at 47 Degrees North Capital Management Ltd., a Pfaeffikon, Switzerland-based fund of funds with about $200 million invested in other managers.

“Intraday volatility is stopping guys with good risk management to participate in the full rally,” he said. “It will be difficult for funds to match commodity prices themselves well into the next year.”

Commodities that gained in seven of the past 10 years are reviving as economies emerge from the global recession, tightening the gap between supply and demand.

U.S. Recovery

The U.S., the world’s biggest oil user, will expand 2.4 percent next year after a 2.5 percent contraction this year, according to the median estimate of 66 economists surveyed by Bloomberg. The International Monetary Fund said this month that the world economy will grow 3.1 percent next year, 0.6 percentage point more than forecast previously.

Governments from Beijing to Berlin spent $12 trillion to help end the contraction, according to data from the Washington- based IMF. China, the world’s biggest copper consumer, imported record amounts in the first half. Crude oil gained as the Organization of Petroleum Exporting Countries curbed output by almost 16 percent in the eight months to March.

The International Energy Agency expects oil demand to expand 1.8 percent next year, from a 1.9 percent drop this year. Copper, aluminum, nickel and zinc supplies will lag behind demand next year, Desjardins Securities Inc. forecasts.

Hedge funds aren’t supposed to track the performance of indexes, said Doug Hepworth, director of research and principal at New York-based Gresham Investment Management LLC, which manages $7 billion in commodities, including index products.

‘Not Fair’

“If you have a commodity hedge fund that behaves like the indexes, you should fire them,” Hepworth said. “If you look at good hedge funds, they made 10 percent last year and they are making 10 percent this year. With the indexes down big last year, 10 percent looks terrific and with commodities up this year, it looks like failure. That’s not fair.”

Commodity funds that are beating the indexes in 2009 include PCE Investors Ltd.’s $47 million Cumulus Energy Fund, run by Peter Brewer. It returned 47 percent in the first nine months. BlueGold Capital Management LLP’s $1.4 billion fund, run by Pierre Andurand and Dennis Crema, advanced 45 percent, and Galena Asset Management Ltd.’s $650 million metals fund returned almost 17 percent. Clive Capital LLC, the largest fund at $3.1 billion, returned 15 percent. They are all based in London.

Commodity assets under management rose by $15 billion to $224 billion in the third quarter, according to Barclays Capital. Assets tracking commodity indexes advanced $6 billion to $92 billion, while cash in exchange-traded products gained $7 billion to $80 billion. The remainder is made up of medium-term notes.

The Risk

As money pours in, the surge in commodity prices may not last because economies aren’t strong enough to drive consumption, said Sean Corrigan, chief investment strategist at Diapason Commodities Management SA in Lausanne, Switzerland, which manages about $6 billion in index products.

“This current run of uninterrupted gains is unlikely to continue uninterrupted,” he said.

To contact the reporters on this story: Chanyaporn Chanjaroen in London at cchanjroen@bloomberg.net; Lars Paulsson in London at lpaulsson@bloomberg.net.

Last Updated: October 26, 2009 07:42 EDT