Analysis: Commodity hedge funds find money more scarce, pedigree pays

Pierre Andurand, who managed $2 billion at his BlueGold oil hedge fund before it folded last year under heavy losses, is headlining a host of one-time commodity stars looking to make a comeback in a less merciful market.

Andurand began trading on Friday at a new $200 million hedge fund that he plans to expand to $500 million by the end of the first quarter and $1 billion eventually. But the 36-year-old Frenchman who tripled his investors' money in his first year at BlueGold will have to face more wary investors this time.

Some of the best commodity fund managers have been repeatedly caught on the wrong foot over the past two years, going long when markets tumbled and short when prices spiked.

Even though the outlook for the U.S. economy and euro zone is brighter this year, and oil prices are rebounding, many investors have pared back their investments in commodity funds after dull returns and spectacular losses like Andurand's 35 percent drop in 2011.

That hasn't stopped some high-profile commodity traders from trying to launch their own funds for the first time or attempt a comeback. Their logic is that money will always find the best talent to run it, even if that talent has had some rotten luck recently. Investment banks, once home to the biggest-earning traders, have also become less desirable places to work, with pay and bonuses falling each year.

In March last year, Morgan Stanley veteran Neal Shear and ex-UBS commodities head Jean Bourlot started Higgs Capital Management in London. In September, Paul Crone, who was chief trader at Touradji Capital Management, started Citrine Capital Management, a metals hedge fund in New York.

In December, Tony Hall and Arno Pilz formed Hall Commodities after leaving London's Duet Commodities Fund with a string of losses. And last month, Andrew McMillan, who oversaw energy investing for Tudor Investment Corp from Singapore, left to set up his own shop with some former colleagues.

Andurand began his career at Goldman Sachs, Wall Street's No. 1 bank for commodities, and went on to Bank of America and Swiss oil merchant Vitol before forming BlueGold in 2008. He had wowed BlueGold investors with a 200 percent gain in his first year, and continued making them happy for another two years before his fortunes changed.

He is counting on wooing back these same investors for his newly launched Andurand Capital in London. For those who return, he will waive any fee on profit until they make back what they had lost at BlueGold since 2011 - honoring what is known in the business as the "high-water mark".

But he isn't sure how long it will take to reach his $1 billion in assets.

"For sure, the space of commodities attracts less money than a few years ago because of range-bound markets and poor performance of the industry over the last 3 years," Andurand said in an email last week.

The Chicago-based Hedge Fund Research estimates that the commodity hedge fund space saw a net outflow of $1.04 billion last year, mostly due to investor redemption and closure.

That would be the first decline of its kind since 2007, according to HFR data. Kenneth Heinz, who runs the hedge fund database, says the figure includes the $4 billion that left the space with the retirement of gas trading wunderkind John Arnold of Houston's Centaurus Energy, and the near $2 billion in losses and redemptions at London's Clive Capital.

In contrast, HFR data showed a record net inflow of $2.8 billion in 2008, when activity peaked just before the crisis.

"Commodities strategies do not seem particularly in demand with hedge fund investors in 2013," said Anurag Bhardwaj, head of hedge fund consulting at the prime broking unit of Barclays which helps match investors with hedge funds.

"There is a chance that investors will load up on commodities when they are fearful of inflation, but that is not the case right now," Bhardwaj said.


The magic number for starting a fund has always been around $100 million, but many now make it with half of that, some even less. Pedigree and past performance remain the key matrix for how much a manager gets.

Being burnt before can also help.

"People often wonder why someone who implodes with a lot of money gets another chance. From a due diligence point of view, you can't give someone who's never managed over $100 million that size of a check," said Jim Liew, who teaches hedge fund strategies at New York University's Stern School of Business.

"Some will argue that it's good to invest in a manager who's had a big drawdown because now they're better at managing risk, assuming they had learnt their lesson."

That leaves little avenue for the aggressive oil, metals and grains traders without a big bank or trade behind their name but who hope to run their own shop too.

"We usually start those out at $15-25 million," said Ernest Scalamandre of AC Investment Management in New York, who has done extensive capital seeding for such commodity start-ups.

"Those guys don't always make it."

A few commodity traders have had success raising money from institutions, investment banks and high net-worth individuals. Atreaus Liquid Global Macro Commodities, run by former Barclays trader Todd Edgar, raised $650 million within seven months last year and ended the year up 1.2 percent, a source familiar with the fund said.

Bill Perkins, a protege of the gas trading guru Arnold, told Reuters in an interview last month he plans to close investments into his Houston-based Skylar Capital Management by June this year. Skylar opened just in October, with about $100 million.

Still, commodity funds are among the hedge fund industry's smallest, making up just over 1 percent of the $2 trillion hedge fund universe. Their assets could shrink further if last year's dismal commodities prices - as well as returns from some of the most well-regarded managers in the space - do not improve.

HFR data shows commodity hedge fund assets rose more than five-fold over the past six years to reach $28 billion. But the bulk of the rise - accounting for annual jumps of $6 billion or more - was during the commodity boom of 2007-2008 and the preliminary rebound from the financial crisis in 2009-2010.

The Thomson Reuters-Jefferies CRB index, a bellwether for commodity prices, fell 3.3 percent last year, extending an 8 percent rout from the previous year. This year so far, the CRB is up 3.4 percent, thanks to a rebound in oil.

In terms of returns, the average commodity hedge fund tracked by HFR rose 2 percent in 2012, rebounding from the near 10 percent loss in 2011.

But that is a far cry from the annualized 25 percent gain for commodity funds in 2005-2007, other industry data gathered by Reuters shows.

"Investors haven't made that huge returns lately and their vetting process for giving out money is taking longer," said Mike Hennessy, managing director at Morgan Creek Capital Management in North Carolina, which invests in commodity hedge funds, among others. "It's a difficult market environment."

(Reporting By Barani Krishnan; Editing by Tiffany Wu and Claudia Parsons)