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Phibro Fund Rose 22% as Commodity Indexes Fell, Document Shows

Date: Monday, September 28, 2009
Author: James Sterngold, Bloomberg

Phibro LLC, the Citigroup Inc. energy-trading unit that the bank may be forced to sell, said funds that it manages for outside investors rose 22 percent since the start of 2008 as commodity indexes fell, a solicitation document showed.

Phibro, run by Andrew Hall, is seeking minimum investments of $25 million for Phibro Commodities Fund II and Phibro Offshore Commodities Fund II, which make investments that are “structurally similar to Phibro’s proprietary positions,” according to the document. The offshore fund returned 5 percent in 2008 after fees, compared with a 46.5 percent loss in the 24- member Standard & Poor’s GSCI Index, and advanced 17 percent through August of this year as the index rose 4.5 percent.

“They didn’t lose money, which a lot of funds did” in 2008, said Peter Fusaro, chairman of Global Change Associates Inc., a New York-based firm that tracks 700 hedge funds with energy-related holdings. “They’re in the middle of the pack.”

Phibro has become emblematic of this year’s debate over excessive pay because its chairman, 58-year-old Andrew Hall, was paid about $100 million in 2008 and could be paid as much or more this year. Leaders of the Group of 20 countries agreed today to adopt guidelines on pay practices at banks and other financial companies that aim to curb risks by aligning rewards with long- term success.

Pay Master

Hall, whose firm is based in Westport, Connecticut, declined to comment on the document, as did Danielle Romero- Apsi, a Citigroup spokeswoman. The New York-based bank had $667 million of revenue last year from commodity trading, mostly from Phibro, while the company overall lost $27.7 billion.

Citigroup has been exploring the sale of all or part of Phibro in part because Hall’s pay has drawn the scrutiny of Kenneth Feinberg, the Obama administration’s special master on compensation, people close to the matter said last month.

Hall, who is paid based on a formula in his contract, has refused to lower his pay for this year and refused requests to reduce the formula in the future or receive part of his compensation in Citigroup shares, the people said.

Phibro, which has been managing money for outside investors since 2007, said in the document that the two funds open to outsiders put “substantially all their assets” in the Phibro Master Commodities Fund II. Phibro receives 20 percent of all profits and 2 percent of the net assets of the funds.

Gyrating Returns

Month-by-month figures show that the funds’ returns have gyrated. They lost 10 percent in July 2008 and had a return of 17.3 percent in May of this year. All told, they lost money in 12 of the past 20 months.

The funds substantially underperformed the S&P GSCI index in early 2008, when oil prices were rising. In June, the funds earned 6 percent while the S&P GSCI index gained 9.2 percent, according to the document. By September, 2008, the funds surpassed the index and remained ahead through August 2009.

The funds’ worst month was July 2008, when they lost almost 10 percent, compared with a 12.2 percent decline in the S&P GSCI. Their best month was May 2009, when they gained 17.3 percent, compared with a 19.7 percent gain for the index.

Phibro said the funds use “minimal” leverage and that they have limited turnover of their trading positions, some of which may be held for years.

Phibro, which mostly trades oil and refined products and also trades electric power, coal, metals and equities, said the funds can exit 90 percent of their positions in one day and almost the entire portfolio in less than five days.

Besides Hall, who has been with Phibro for 27 years, the unit’s top executives are John Petti, 48, a vice chairman and senior proprietary trader, and Malcolm McAvity, 58, a vice chairman and senior oil trader. Senior Phibro management has an average of tenure of 25 years and overall the staff has an average tenure of 17 years, the document said.

To contact the reporter on this story: James Sterngold in New York at jsterngold2@bloomberg.net