Red Kite Metals Hedge Fund Lost About 22% Last Month

Date: Friday, December 14, 2007
Author: Saijel Kishan, Bloomberg

Dec. 13 (Bloomberg) -- Red Kite Metals, the hedge fund that almost tripled investors' money last year, lost about 22 percent in November as copper prices fell, according to two investors in the fund.

Red Kite, co-founded by Michael Farmer, 62, who once ran the world's largest copper-trading company, has tumbled about 50 percent this year, according to the investors, who declined to be identified because the information is private. Todd Fogarty, a New York-based spokesman for Red Kite, wouldn't comment. Red Kite is the main fund of RK Capital Management Ltd., which had more than $1 billion under management as recently as September.

``When a large commodity hedge fund has such a big drawdown, it usually means they have a concentrated position in the market that everyone can see,'' said Antoine Thioly, a fund manager at Geneva-based Modula Capital Advisers SA, which invests in hedge funds and isn't a client of Red Kite. ``These markets are thinly traded as it is, so basically they're stuck.''

Copper slumped 9.4 percent last month as inventories gained and traders speculated that a slowing U.S. economy will curb demand. Nickel and zinc also declined, while the London Metal Exchange Index is heading for its first annual loss since 2001.

Red Kite, named after the bird of prey, returned 188 percent last year. The fund lost about 20 percent in August. In February, investors agreed to give 45 days notice before taking their money out, instead of the 15 days previously required. RK Capital, which is run out of London and New York, said at the time that withdrawals were ``insignificant.''

Housing Slowdown

The LME Index lost 8.6 percent in November and is down 7.4 percent for the year. Copper for delivery in three months on the LME dropped 2.8 percent to $6,535 a metric ton as of 5:29 p.m. local time. It has fallen 35 percent since trading at a record $8,800 in May 2006.

The metal is used in wiring and plumbing, and is considered to be a bellwether for the economy. It has also declined in the past month on speculation that the housing slump in the U.S., the biggest copper user after China, may spread to Europe and Asia.

Copper stockpiles tracked by the LME climbed 28 percent in November. About 80 percent to 89 percent of available LME stockpiles were held by one firm as of Dec. 11, according to a daily report from the exchange.

Trading of copper futures has increased 44 percent to 6,941 lots a day in the last 4 1/2 months, John Kemp, an analyst at Sempra Metals Ltd. in London said in a note to clients today.

`Huge Position'

``There has been a marked structural change in the market,'' he said. ``It is consistent with one or more market participants exiting a huge position, or entering one.''

Other industrial metals have also slumped this year. Zinc has lost 43 percent on increased exports from China and the startup of Apex Silver Mines Ltd.'s San Cristobal mine in Bolivia. Nickel is down 22 percent after stainless-steel makers reduced their consumption of the metal.

Other hedge funds have fared better this year. Touradji Capital Management LP, a New York-based commodities hedge fund that manages more than $3 billion, has returned about 40 percent this year, according to an investor in the fund. The firm is run by Paul Touradji, 36, a former commodities trader at Julian Robertson's Tiger Management LLC hedge fund. Touradji declined to comment through a spokesman.

Other winners include John Paulson, the manager whose credit hedge funds gained an average of 440 percent this year as of Nov. 30 after betting against subprime mortgages.

Still, elsewhere losses became so bad this year that investor demands for cash forced the shutdown of two funds at Global Advisors in London and New York, co-founded by Daniel Masters, JPMorgan Chase & Co.'s former head of energy trading.

Philipp Brothers

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested. Globally they fell about 1.4 percent in November, paring their annual returns to 10.2 percent, according to Chicago-based Hedge Fund Research Inc.

Farmer has traded metals for about 40 years. He worked at commodity-trading firm Philipp Brothers before starting Metal & Commodity Co., a unit of Germany's Metallgesellschaft AG, the largest copper trader, in 1999. Metallgesellschaft is now part of Sempra Commodities, in which Royal Bank of Scotland Group Plc has a majority stake. Philipp Brothers is now known as Phibro and is part of Citigroup Inc.

To contact the reporter on this story: Saijel Kishan in London at skishan@bloomberg.net