Hedge Funds Burned by Commodities Lose $40 Billion Since '08

  • 2015 was "difficult year" for commodity hedge funds: Trafigura
  • Trafigura shut down its flagship Galena Metals Fund this year

Why Forecasting Commodity Prices May Be Pointless

The biggest commodities meltdown in a generation has cost hedge funds more than $40 billion in seven years.

Losses due to poor performance and investor withdrawals have left assets at the top 10 commodities hedge funds at less than $10 billion, compared with more than $50 billion in 2008, according to estimates from Trafigura Pte Ltd.’s annual report. The trader and asset manager said the perception of commodities as an investable asset has been replaced by a “generalized aversion."

“Commodities as an asset class are not as attractive as before and we are seeing the consequences on our asset management division,” Trafigura Chief Financial Officer Christophe Salmon said in a phone interview. “It is probably one of the consequences of the end of the commodities supercycle.”

Trafigura last month joined other traders by shutting down its flagship Galena Metals Fund during the worst year for raw material prices since the global financial crisis of 2008. Duncan Letchford, the chief executive officer of the company’s Galena Asset Management, stepped down.

“We have seen a sea-change in investor attitudes,” Trafigura said in the annual report. “Such was the negative sentiment towards the sector, that a number of our investors drew down their accounts and exited the commodities segment, with the result that our assets under management fell year-on-year.”

The Bloomberg Commodity Index, which tracks investor returns from 22 natural resources, has plunged two-thirds from its peak to the lowest level since 1999.

Overall 2015 was “a difficult year” for commodity-related hedge funds, Trafigura said. The market became less liquid and more difficult to trade as hedge fund withdrawals led to closures, the trader said. Since 2012, at least 12 asset managers in commodities, including high-profile names such as Clive Capital LLP and Centaurus Energy LP, and startups like Higgs Capital Management and Mastic Investment have closed.

Hedge funds betting on raw materials are heading for their worst performance in seven years after losing 4.6 percent in the first 10 months of 2015, according to the Newedge Commodity Trading Index.

"There are opportunities in the market, albeit fewer than before, and we want to be in a position to seize them at the right moment," Trafigura said. "The strategy is to await the greater value opportunities that currently distressed commodities markets are likely to expose -- for example in coal, zinc or iron ore."

Annual Loss

The $230 million Galena Metal Fund dropped 8.6 percent this year, heading for its first annual loss since 2012, according to data compiled by Bloomberg. The fund, which was more than twice its current size five years ago, had made money in nine out of 10 years since it was started in 2004.

Galena “strictly” limited the use of leverage in its long-short Metals Fund and confining its Commodity Trade Finance Fund to top-quality borrowers, Trafigura said. While the Private Equity Resources Fund has raised $415 million to invest in the equity and debt of metals and mining companies, it has so far invested only $150 million and made no transactions in the year through September, the company said.

Trafigura on Monday reported earnings from oil trading surged to a record in the 12 months through Sept. 30, countering a difficult year for its metals business and a number of asset writedowns.

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