RK Capital Hedge Funds Lost Up to 30% in August as Metals Fell

Date: Thursday, September 11, 2008
Author: Saijel Kishan and Stewart Bailey, Bloomberg

RK Capital Management LLP, the metals hedge-fund firm co-founded by Michael Farmer, lost as much as 30 percent last month amid falling copper and aluminum prices, according to an investor with the firm.

The declines cut the combined returns of the firm's five funds to about 2 percent this year, said the investor, who asked not to be identified because the information is private. Red Kite Metals, the company's biggest fund, dropped about 40 percent, bringing this year's loss to as much as 7 percent.

The London Metal Exchange Index of six industrial metals fell 6.6 percent last month and is down 3.6 percent in 2008 as the slowing global economy cut demand for materials such as lead and zinc. Ospraie Management LLC, the New York-based commodity hedge-fund firm run by Dwight Anderson, said last week it will shut down its biggest fund after it lost 39 percent this year.

``We're in an ongoing significant correction in commodities that has already claimed its first couple of victims,'' said Paul Ross, head of London's Iveagh Asset Management, the investment arm of the Guinness family brewing fortune. ``There are a lot of market participants who've been caught out on the wrong side of a significant market correction.''

The UBS Bloomberg Constant Maturity Commodity Index of 26 contracts has slumped 21 percent from its July peak as U.S. natural gas, oil and wheat tumbled amid slowing demand and rising inventories. The index had rallied since 2002 and had gained 33 percent this year before reaching a record on July 2.

``Red Kite experienced difficult trading conditions in August and its trading funds had disappointing performance,'' Todd Fogarty, a spokesman for RK Capital, which has offices in New York and London, said in an e-mailed statement.

Anglian Fund

The selloff since July has hurt hedge funds including Proxima Alfa Investments LLC's $400 million Anglian Commodities Fund, run by Julian Barrowcliffe, 46, a former Bank of America Corp. energy trader. The fund declined 10 percent in July and 16.5 percent for the year, according to an investor letter.

RK Capital was co-founded in 2005 by Farmer, 63, who once ran the world's largest copper-trading company, with metals traders David Lilley and Oskar Lewnowski. Red Kite Metals fund, named after the bird of prey, lost as much as 50 percent through November last year after almost tripling investors' money in 2006.

RK Capital this year started Red Kite Explorer Fund, which sets up financing and supply contracts with mining companies, and Hong Feng Zheng, which trades equities and futures, mainly in Asia. RK Capital also manages the Compass and Prospect funds, which were started in 2006.

High Watermarks

``All but one of these funds, and the majority of investor assets, are at, or above, their high watermarks,'' said Fogarty, referring to the level when a fund must make up previous losses before charging investors a performance fee.

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.

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. Managers lost an average of 1.37 percent last month, extending their year-to-date loss to 4.83 percent, according to Chicago- based Hedge Fund Research Inc.

Some commodity hedge funds have fared better this year. The biggest fund of Touradji Capital Management LP, a New York-based firm that manages $3.5 billion, returned 6 percent in August, leaving it unchanged this year, according to an investor. The firm was founded by Paul Touradji, 36, a former commodities trader at Julian Robertson's Tiger Management LLC hedge fund.

BlueGold Capital Management LLP, an energy fund co-run by Pierre Andurand, 31, who previously worked at oil-trading company Vitol Holding BV, returned 2.4 percent in August, extending its gain for the year to 114 percent, according to estimates given to investors. The London-based firm was started in February and oversees $817 million.

To contact the reporters on this story: Saijel Kishan in New York at skishan@bloomberg.net; Stewart Bailey in Denver at sbailey7@bloomberg.net.