Ospraie fund to close after August hit

NEW YORK Wed Sep 3, 2008 9:18am EDT

A trader signals an order in a file photo. REUTERS/File

A trader signals an order in a file photo.

Credit: Reuters/File

NEW YORK (Reuters) - Hedge fund manager Ospraie Management LLC will close its flagship fund after it plunged 27 percent in August on losses in energy, mining and natural resources equity holdings, in one of the biggest ever closures of a commodities-focused hedge fund.

The closure of the fund, announced by the firm's founder Dwight Anderson in a letter to investors on Tuesday, could be more bad news for Lehman Brothers Holdings Inc, which took a 20 percent stake in the hedge fund manager in 2005.

One expert said the closure of the fund, which at the time of the letter's writing had lost 38.59 percent this year, may also have played a role in bringing down U.S. stocks on Tuesday, which fell after initially climbing more than 1 percent. Lehman shares were down more than 3 percent in after-hours trading.

"This is just adding to the fire for commodity-related names," said Peter Holst, managing director at Delta Global Advisors in Southern California. "Even this morning when the market opened, some of the names that Ospraie has positions in were getting hammered."

Ospraie and Lehman declined to comment.

As of the beginning of August, the flagship fund, Ospraie Fund Ltd, had $2.8 billion invested, a person familiar with the situation said.

Ospraie Management still manages $4 billion in other investment funds, including a special opportunities fund, the source said. That fund bought the commodity trading and merchandising operations of ConAgra Foods Inc earlier this year.

In the letter, Ospraie Management said it planned to distribute 40 percent of Ospraie Fund's assets to investors by September 30 and an additional 40 percent by the year-end. The remaining 20 percent of the fund's assets are mostly illiquid and could take up to three years to give back to investors, it said.

Based on a Securities and Exchange Commission filing, Ospraie Management held shares in companies including Alcoa Inc and Arch Coal Inc. It was not immediately clear which fund held what stocks.

Ospraie owns major stakes in several Australian resources companies, mostly held through Ospraie Portfolio Ltd, in which Ospraie Fund is a main shareholder.

Ospraie Portfolio owns about 16 percent of Australian plantations group Great Southern Ltd and 19.5 percent of Consolidated Rutile Ltd.

"At this stage we have no reason to think the announcement will have any impact on Great Southern," Great Southern spokesman David Ikin said in an e-mail.

Ospraie Fund had an 11.8 percent stake in Iluka Resources Ltd but that was sold to below 5 percent last week, according to a substantial shareholder notice to the Australian securities exchange. "They've reduced, if not exited, their holdings," said Iluka spokesman Robert Porter.

Ospraie also owns at least 5 percent in Australian resources and mining services companies Emeco Holdings Ltd and Mineral Deposits Ltd. Executives at Consolidated Rutile, Emeco and Mineral Deposits were not immediately available to comment. A UBS dealer in Australia said he could not comment on Ospraie's sell-off due to client confidentiality.

Anderson said in the letter he was extremely disappointed with the outcome.

"Not only as a portfolio manager, but as one of the largest investors in the Ospraie Fund L.P., I have shared in the losses with you," he wrote. "After nine years of striving to be a good steward of your capital, I am very sorry for this outcome."

He said the decision to close the fund was reached after it breached a threshold which would have allowed investors to redeem their money irrespective of the fund's lock-up provisions.

This marks the second time in two years that Ospraie Management, which has been a major player in commodities markets, has run into problems. In early 2006 soured bets on copper left the fund down roughly 20 percent before it pared most of those losses by year's end.

Also in 2006 Anderson, who made his name in hedge funds at Tudor Investment Corp and Tiger Management LLC, closed down his $250 million Ospraie Point fund.

Ospraie Management is the latest in a number of hedge funds to have run into trouble in the $2 trillion hedge fund industry this year. Last month, Dan Benton said he will shut down his $2 billion Andor Capital.

"I think it's probably the first of more hedge fund closings to come, given that a significant majority of hedge funds have had negative performance this year," said Chris Orndorff, head of equity strategy at Payden & Rygel in Los Angeles.

"I think it's another piece of bad news for Lehman which is unfortunate and it probably raises the stakes on their conversations with the Korean Development Bank," he said.

KDB confirmed on Tuesday it was in talks over a possible joint investment in Lehman with other Korean banks.

Lehman, which has racked up losses, is under pressure to raise capital ahead of its earnings announcement this month. The No.4 U.S. investment bank has explored shedding assets and selling a significant stake to outside investors.

(Additional reporting by Sonali Paul in MELBOURNE, and Kristina Cooke and Svea Herbst-Bayliss in NEW YORK; Editing by Andre Grenon and Ian Geoghegan)

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