June 24, 2011 / 7:59 AM / in 6 years

Hedge funds fear commodity bull run may be over

MONACO (Reuters) - The price of gold, copper and other commodities may have peaked, say hedge fund managers meeting in Monaco this week, who are avoiding the sector for fear that last month’s sharp sell-off may herald further falls.

Executives at the GAIM conference said gold and base metals, which have boomed in recent years thanks to rising demand and low interest rates, along with the recent wave of high-profile mining company flotations, looked over-priced.

“We might be wary of putting money into a long-bias commodities strategy short-term. I sense they’re peaking,” said hedge fund seeder Patric de Gentile-Williams, chief operating officer at FRM Capital Advisors, in an interview.

His comments follow a sharp sell-off in commodities in the first week of May, with oil losing up to $13 a barrel at one point on May 5 and silver falling 12 percent on the same day.

Hedge funds lost 1.28 percent during the month, their first down month since last August, according to Hedge Fund Research, with some big-name managers losing more.

Robert Marquardt, founder of fund-of-hedge-funds firm Signet, told Reuters he had just closed down a fund he launched in 2003 that was denominated in gold and has returned cash to investors.

“Gold at $1,500 is now a speculation. It’s no longer a store of value,” he said. “Everyone apart from the U.S. has got rising interest rates, and economic growth is probably going to slow.”

Gold, which has rocketed from less than $400 in 2003, hit a record high above $1,575 on May 2 but was also hit in last month’s sell-off.


There is even caution among funds that bet only on rising prices.

    Coast Sullenger, managing director of Gaia Capital, which buys commodity-related stocks, said in an interview on the sidelines of the conference that he was cautious on base metals such as copper, but positive on precious metals.

    “There’s still a very strong trend towards infrastructure spending and consumption, particularly in emerging regions. But some of the base metals ... are trading at a price significantly above the marginal cost of production,” he said.

    He also warned that some recent commodity-related IPOs (initial public offerings), which have come on the back of surging investor interest and booming prices, looked expensive.

    Recent high-profile flotations have included Vallares VLRS.L, a bid vehicle targeting emerging market oil assets backed by financier Nat Rothschild and former BP boss Tony Hayward, as well as the bumper float of Glencore (GLEN.L).

    “I would characterise where we’ve been as coming off a bit of a frothy period in terms of equity issuance, and we’re having a bit of indigestion in the market,” Sullenger said.

    His comments echo those of Jon Moulton, chairman of Better Capital, who this week told Reuters that “some IPO issues ... look quite bubbly -- Caparo Energy, the Nat Rothschild stuff. They look incredibly bubbly”.

    Editing by Will Waterman

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