Commodity funds down in first quarter, even as energy markets rally

NEW YORK Wed May 7, 2014 4:49pm EDT

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NEW YORK (Reuters) - Two-thirds of commodity hedge funds lost money in the first quarter, extending last year's dismal run, possibly because they bet against higher crop and energy prices in a rallying market, data from futures broker Newedge and banker HSBC showed on Wednesday.

Of some 120 commodity-focused funds in the United States and Europe that either trade on discretion or follow trends, about 70 finished lower in the three months through March, despite a run-up in the corn, wheat, soybean, arabica coffee, lean hog and natural gas markets, the data showed.

That was in contrast to results from investment banks such as Citigroup Inc, Goldman Sachs Group Inc, Morgan Stanley and Macquarie Group Ltd, which showed strong gains from commodities in the first quarter as the firms traded in or hedged against higher gas prices for their clients during a brutal winter. The trading desks of some oil companies, including BP Plc, also reported good returns.

The funds listed by Newedge and HSBC could have missed out on gains by going short on markets as the polar vortex across the United States swept energy, power and grains prices higher.

Some of the funds also had investor redemptions, extending outflows last year.

London's Armajaro Commodities Fund, run by Armajaro Asset Management, had a drop in capital of nearly 25 percent to below $700 million during the first quarter, Newedge's Nelson Report on alternative investment funds showed.

Krom River Commodity Fund in Baar, Switzerland lost 20 percent of its assets, to below $230 million, in the quarter, according to HSBC's HedgeWeekly data.

Both funds confirmed with Reuters they had redemptions.

The woeful performance of the many commodity hedge funds could alienate investors even as raw materials prices continue rising, analysts said. Thomson Reuters/Core Commodity CRB Index, which tracks 19 commodity markets, rose 9 percent during the quarter for its best three months since Sept 2012.

"The reality is commodities remain one of the most hated places in the investment space," said Marcus Storr, head of hedge funds at Feri, an asset manager in Bad Homburg, Germany, managing $24 billion euros of mostly institutional client money.

"In general, since 2012 and through 2013, the commodities hedge fund space has lost quite a lot of money."

The best performing commodity fund for the first quarter on the Newedge's Nelson Report was London-based Cumulus Energy, a $490 million discretionary-based fund, which posted a return of more than 20 percent. Cumulus, run by City Financial Investment Co, declined comment.

The largest commodity fund on the Nelson report, the $1.8 billion trend-following Gresham Tangible Asset Program in New York, returned nearly 5 percent for the quarter. It was one of the few funds that appeared to have asset growth during the period, with its capital rising from $1.66 billion in December.

Jon Spencer, president of Gresham Investment Management LLC, confirmed the fund did well, but declined further comment.

On HSBC's Hedge Weekly, the $134 million Merchant Commodity Fund, which trades out of London, was the best performing commodity fund, returning more than 10 percent for the quarter. Merchant gained from being long on natural gas and U.S. crude oil, and short on coal and U.K. Brent crude, its Singapore-based risk manager Michael Coleman told Reuters.

(Reporting By Barani Krishnan. Editing by Andre Grenon)

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