Another wild summer for oil hits another big fund

By Barani Krishnan

NEW YORK (Reuters) - Wild swings in crude oil prices this summer helped push losses at a big hedge fund into the billions, just two years after energy market volatility drove Amaranth Advisors out of business with $6 billion of losses in one week.

Ospraie Management said it lost about $3 billion of the roughly $7 billion it manages due to failed bets on energy, mining and natural resource stocks. The disclosure came Tuesday, after crude prices had given back nearly all of the 40 percent gain they had amassed this year as they surged to a record beyond $140 a barrel in early July.

Ospraie was not the only fund that ran into trouble. Data from Hedge Fund Research (HFR) shows that as many as 679 hedge funds may have been liquidated this year against the 987 launched, reflecting a failure rate of almost 70 percent.

"The failure of a small hedge fund doesn't come as a particular surprise to anyone in the financial services industry, but the meltdown of a multibillion (dollar) fund certainly attracts most people's attention," Jim McWhinney, a funds commentator, wrote on Investopedia.com.

"Most hedge funds are designed and sold on the premise that they will make a profit regardless of market conditions. Losses that are of such magnitude that they trigger a flood of investor redemptions that force the fund to close are truly headline-grabbing anomalies," McWhinney wrote.

Two years ago, oil crossed $70 a barrel and the $9 billion hedge fund, Amaranth Advisors lost about $6 billion in a week by betting natural gas prices would rise along with crude. Instead, they fell.

"Both events coincided with significant reversals in energy prices although there are various dissimilarities as well in the exposure of the two funds," said HFR President Kenneth Heinz.

Amaranth was a multistrategy fund while Ospraie focused more on commodities.

While Amaranth collapsed, Ospraie announced only the closure of its flagship fund. It is expected to keep open other vehicles managing the remaining $4 billion in its holdings, including a unit that bought into ConAgra Foods Inc (CAG.N) earlier this year.

HFR's Macro (Total) Index, which captures the performance of commodity hedge funds, is up 3.78 percent for the year. But July was a brutal month, with the index losing 2.63 percent, wiping out all of May and June's gains as oil prices reversed.

"When you have movements of two sigma or more, or two standard deviations or more, in oil or energy markets, there's always going to be some hedge fund that's going to be on the wrong side of the market," said Charles Gradante, principal at the Hennessee Group, which monitors hedge fund performances.

U.S. crude surged from this year's bottom of $86.24 on February 7 to an all-time peak of $147.27 on July 11. By September 2, it had dropped back to as low as $105.46.

Two years ago, the spread between the March and April 2007 natural gas contracts shrunk from $2.49 at the end of August 2006 to 58 cents by the end of September 2006. Amaranth had bet on the spread widening instead.

Ospraie told investors its losses came from a substantial sell-off in a number of positions taken in commodity and equity markets during a six-week period.

It said the period was "characterized by some of the sharpest declines in these sectors in the past 10 to 20 years."