Aug. 3 (Bloomberg) -- MotherRock LP, the hedge fund firm run by former Nymex President Robert ``Bo'' Collins, is preparing to shut down because of ``terrible performance'' as natural gas plunged this year.

``We are in the process of developing a detailed plan for winding down the fund,'' Collins said in a letter sent today to investors in his MotherRock Energy Master Fund. MotherRock, begun in December 2004, invests in gas futures, seeking to exploit price differences based on the delivery month for the contracts.

Benchmark New York gas prices dropped 66 percent from an all-time high in December as a mild winter created a supply glut and then rallied in the second half of July. While prices for summer fell, contracts for next winter stayed high, widening the price differential or spread.

``The volatility in these markets is very large,'' said Craig Pirrong, director of energy markets at the University of Houston's Global Energy Management Institute. ``That means the prospects for large profits are there, but the prospects for large losses are there too.''

MotherRock had ``significant losses'' in July, though a final tally is not yet available, Collins said in the letter, obtained by Bloomberg News. The timing of the shutdown has not been established, according to the letter.

In the first half of this year, MotherRock lost more than 23 percent, with most of the damage coming in June. The fund returned 20 percent to investors net of fees last year.

MotherRock had more than $400 million in customer funds earlier this year. A phone call to Collins was not returned.

`Terrible Performance'

MotherRock raised money from investors such as Silver Creek LLC, a Seattle-based hedge fund investor, whose emerging manager fund had a 1 percent stake in Collins's fund. Silver Creek redeemed its investment earlier this year and the fund is up 9.4 percent this year. Jonathan Gasthalter, a spokesman for Silver Creek, declined to comment.

``Let me say upfront that I regret MotherRock's terrible performance and its impact on your investments,'' Collins said in the letter. ``Our primary concern at this point is to protect investors' remaining capital.''

Collins, 40, was president of Nymex from 2001 to 2004. Prior to joining Nymex, he was senior vice president for natural gas trading at El Paso Corp.

Pirrong said large swings in profit and loss were common for new hedge funds and that funds run by Citadel and Ritchie Capital Management sustained large losses in energy after Hurricane Katrina last year sent prices soaring.

``There is a pretty high rate of mortality among hedge funds,'' Pirrong said. ``When things are good they are very good, but when they're bad they're awful.''

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net.

Last Updated: August 3, 2006 17:28 EDT