Tuesday, September 2, 2008

Ospraie Fund to Close

Speak of the devil, we just mentioned this potential for major weakness among funds with commodity exposure in our Goldman Sachs piece earlier today - the 1st half of 2008 was the worst in 20 years for hedge funds with July being a gosh awful month as many piled into a crowded trade. So a good sized fund named Ospraie is closing shop. I would not be surprised that some of today's selloff in commodities was Ospraie liquidating positions because once other hedgies get wind of a flameout they will short against those positions to squeeze the weak - call it Darwinism. Once more this highlights that "the efficient market" is nonsense in this day and age when huge pools of capitals entering, exiting, or in fact dying off are moving individual stocks and sectors far more than... ahem... fundamentals.
  • Ospraie Fund, a big commodities fund partly owned by Lehman Brothers Holdings, is closing down and will return money to investors after incurring big losses this year.
  • People close to the fund, which had nearly $4 billion in assets, said the losses resulted from bad bets in copper and natural gas, causing the flagship fund to lose 38% since the beginning of the year.
  • The closing of the fund is a big blow to Lehman, whose 20% stake in Ospraie is part of the investment-management business that Lehman is shopping to help raise capital.
  • "This is absolute shocker," John Kilduff, senior VP of Energy Trading at MF Global, and a CNBC contributor, said in response to Ospraie's closing.
  • Kilduff said Dwight Anderson, Ospraie's founder, has a "great track record and is considered one of the smartest guys in commodity trading. He's highly regraded." (not to worry folks as I know many of you will lose sleep over the fate of Mr. Anderson - as we all know by now when a highly regarded manager loses 40% in 8 months it's chalked up to a mistake - and they go quietly in the still of the night for half a year and then come back with a new round of fund raising and a new hedge fund by late next year at the latest - now if a sucker like me lost 38% there would be no "highly regarded" comments - we're just a doofus - so once again, lever yourself up to the gills, take outsized risks, lose nearly half your money in 8 months and when it blows up you just start over in a year.) [Apr 8: Hedge Fund Manager - Good Work if you can Get It]
  • In a deal that closed earlier this summer, Ospraie purchased ConAgra's trading arm, utilizing information from ConAgra's physical production of corn, wheat and all agricultural prodcuts to trade in the futures market. In Kilduff's opinion that gave Osperai a huge advantage, until the current losses started setting in.
From Bloomberg
  • The Ospraie Fund lost 26.7 percent in August, after a ``substantial sell-off in a number of our energy, mining and resource equity holdings,'' Anderson, 41, wrote in the letter today.
  • ``I am extremely disappointed with this result and the fund's sudden reversal in performance,'' he said. ``After nine years of striving to be a good steward of your capital, I am very sorry for this outcome.'' (wow so he got started at 32; makes me feel like even more of an underachiever)

I don't know how "shocking" it was considering the Wall Street Journal had pointed out the plight just 6 weeks ago

  • Falling commodities prices have pulled some hedge funds deep into negative territory in recent weeks, confounding veteran managers whose investors started the year looking for big returns from a bull market.
  • The Ospraie Fund overseen by Dwight Anderson's Ospraie Management LLC in New York is among the most prominent losers.
  • Wrong-way bets on energy and resources stocks have helped pare roughly $1 billion from the fund since it peaked near $3.8 billion in assets late last year, according to a person familiar with the fund. The Ospraie Fund, Mr. Anderson's biggest, has declined more than 20% this year as of this week, continuing a slide that amounted to a negative 13% return in July alone. (so from July 15th to today, a span of 6 weeks it doubled its loss)
  • For many of Mr. Anderson's investors, the turmoil rings familiar. In early 2006, Ospraie lost almost 20% in its flagship fund as its managers wrongly guessed the direction in which copper prices were headed. But the fund bounced back enough to finish 2006 down about 6%, then swung back in 2007 to gain about 12% for the year. (and for this massive "outperformance" - down 6% in 2006 in an up market mind you, up 12% in 2007, followed by down 38% in 2008, we are going to clap from the sidelines and then rush to give billions more to the guy in about a year's time for his NEW fund - because only about 75% of mutual funds without 80% the hedging ability of a hedge fund outperformed the past 3 years? I really wonder what is going on in the mind of rich people sometimes - I guess there is simply too much money sloshing around the world and they cannot be seen telling their friends at cocktail parties they invested in a mutual fund - the horror and shame)
  • Before the copper bet, the Ospraie Fund had posted average annual gains of about 18% since 1999. (ah I see - once more folks, as long as your hedge fund blow up takes some time - preferably past year 5 of your life, you can become very wealthy - put in a few good years, and then once you blow up your investors you can say "well we had a good run - I have to go rethink my strategy in one of my 18 homes")
  • A rebound is crucial for Ospraie to hold onto investors in the fund for the long-term and start collecting lucrative performance fees again, which for many hedge funds amount to 20% of profits. (not so much)
  • Mr. Anderson formed Ospraie while he was working at Tudor Investment Corp., Paul Tudor Jones's Greenwich, Conn., hedge-fund firm. Mr. Anderson previously worked with Julian Robertson in the 1990s at Tiger Management Corp. (ah the "bloodlines" - if you work with Tudor and Robertson you *ARE* by the transitive theory.... a genius - just like everyone who played basketball with Michael Jordan is a superstar)
Even the "best and brightest" are being eaten up by this unmitigated volatility and random action. I keep saying don't try to "explain" the day to day activity - we have no idea how many funds are being delevered or who is being forced out of positions by their lenders and risk managers so trying to explain huge daily swings is nothing more than a way to fill up financial TV time. Since so many hedge funds are levered to the eyeballs so they can make even larger profits (i.e. if you can make 20% of profits on $500M why not lever 10:1 and make 20% profits on $5 Billion? or 20:1! 40:1? No we leave that for Bear Stearns and others) the "margin calls" can create some massive dislocations.

Sorry folks, for someone trying to raise just a few million to get into the bottom rung of the "rat race" these stories continuously bug me so I'll continue to rail against the ridiculous nature of it all. Even if I am "naive" to the ways of the 'sophisticated' money management industry. I look forward to running my own hedge fund someday so I too, can lose investors 40,50,60% of their money and be lauded for my track record. ("well before he lost half of it, he was on a great run!") As always we point to a "Black Swan" event and promise it won't ever happen again - I already have my excuses lined up. Now send me a few billions so I can prove it to you.

[Aug 23: NYT - Running a Hedge Fund is Harder than it Looks on TV]
[Jul 12: Some More Hedge Funds Biting the Dust]
[Mar 28: Founder of Long Term Capital Failing Again]

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