Editorial: Hedge funds humbled

The past half year of plummeting commodity prices took its toll on two big-name commodity funds during the week ended Sept. 6, the 36th trading week of 2008.

• In London on Sept. 3, hedge fund RAB Capital’s powerhouse chief executive and co-founder Philip Richards resigned, to be replaced inhouse by Stephen Couttie.

Representing the “R” in “RAB,” Richards left Merrill Lynch in 1999 with partner Michael Alen-Buckley to start RAB with only US$18 million under management. By the time RAB went public on AIM five short years later, that sum had swelled to US$1.4 billion, with much of that growth generated from Richards’ cornerstone, commodity-focused Special Situations Fund, which helped make him one of the richest men in the City. While he exits as chief executive, Richards will hang on as manager of the Special Situations Fund.

In its heyday, RAB Capital’s top dogs distinguished themselves as extremely savvy, early-stage investors in the resource sector globally, carrying on business in the City’s characteristic style of cultured ruthlessness.

But 2008 has not been so kind to RAB Capital and its AIM-listed Special Situations Fund; both are down more than 50% so far this year. RAB’s highest-profile blunder was its large investment in failed British bank Northern Rock, though these losses were dwarfed by the ones sparked by the downturn in commodities.

Here in North America, quite a few mining juniors have had, and still have, RAB as a significant investor, so any liquidation of the fund in the coming months will put heavy downward pressure on the shares of those juniors.

• On the same day in New York, Dwight Anderson’s Ospraie Management announced it is closing its flagship Ospraie Fund, which dropped 39% this year, including 26.7% in August alone, owing to too many bad bets on commodity stocks. Any loss greater than 30% triggered a provision allowing investors to take their money out of the fund.

Ospraie plans to have liquidated and returned 40% of the fund to investors by the end of September and another 40% before January. The rest could take up to three years to turn into cash.

It’s quite a comedown for what was the largest commodity hedge fund firm. It, too, started in 1999 and was managing US$2.8 billion at the start of August. Ospraie Management will now run three remaining funds with US$4 billion in assets, down from US$9 billion in March.

A contrite Anderson wrote to fundholders that he is “extremely disappointed with this result and the fund’s sudden reversal in performance. . . After nine years of striving to be a good steward of your capital, I am very sorry for this outcome.”

• Another hedge fund in trouble is New York-based Atticus Capital, which denied a report that it was being liquidated after a revelation that the capital it had under management had shrunk to US$14 billion from US$20 billion a year ago, after US$5 billion in losses in 2008 alone. Worryingly, Atticus is suspending its mid-month performance reporting and limiting it to month-end, and is stupidly blaming its own clientele for leaking performance data to the press.

• But the hedge-fund crash-and-burns were just the lead up to even bigger financial mayhem on the weekend: the U. S. government made its historic takeover — long-predicted by the goldbugs — of housing giants Federal National Mortgage Association and the Federal Home Mortgage Corporation, nicknamed Fannie Mae and Freddie Mac, respectively.

When trading resumed, Fannie shares nosedived 90% while Freddie plummeted 83%, and about US$70 billion in market cap has been wiped out since earlier this year. The rest of the stock market soared, though, as the strong possibility of a bank run in the U. S. was avoided, at least for now.

To add insult to the injury suffered by U. S. taxpayers, the two dismissed heads of Fannie and Freddie stand to collect more than US$23 million between them in severance pay and benefits on their way out the door. So long, suckers!

• The mining sector’s week was defined by another brutal wave of price pressure on stocks: roughly half of all mining stocks traded in North America hit new 52-week lows over the period. Lately we’ve also witnessed the largest exodus of CFOs from mining companies since the last 1990s — always a sign that, beneath the gloss of happy talk, a company’s books and outlook are highly discouraging to a money person who can move relatively easily to greener pastures in another industry.

Send your Letters-to-the-Editor and other op-ed submissions to the Editor at: tnm@northernminer.com, fax: (416) 510-5137, or 12 Concorde Pl., Suite 800, Toronto, ON M3C 4J2.