risk management

I wonder if stories like this will have institutions re-evaluate their risk management software?

Red Kite Fund Lost 30% on Metals Bet, Investors Say (Update1)

By Saijel Kishan and Chanyaporn Chanjaroen

Feb. 5 (Bloomberg) -- Red Kite Metals, part of a $1 billion hedge fund run by RK Capital Management LLP, lost about 30 percent in January as metals prices tumbled, said two investors in the fund.

The slump followed a 9.4 percent decline in copper last month, said one of the investors, who declined to be identified because details of the fund's performance are confidential. David Lilley, a London-based partner who on Jan. 20 said he was bullish on copper, would neither confirm nor deny the loss in an e-mail today.

RK Capital, co-founded two years ago by Michael Farmer, was one of the best-performing commodity funds in 2006 as prices for copper, zinc and related metals surged, the result of expanding economies in Asia. Copper and zinc sank on Feb. 2 on concern Red Kite investors would demand their money, forcing the hedge fund to sell contracts to raise cash and driving prices even lower.

``Size is important in commodity markets,'' said Kimberly Tara, chief executive officer of Geneva-based FourWinds Capital Management, which invests in commodity funds. ``If your assets are large in relation to the markets you trade in, you have to take big positions. Those positions then become transparent and expose you to larger risks in the market.''

Jim Rogers, who predicted the start of the commodities rally in 1999, said more hedge funds may collapse after the demise of Amaranth Advisors LLC last year.

`Huge Ramifications'

``I don't know who has got what positions and in what, but I know when some of them start blowing up, it's going to have huge ramifications,'' Rogers, the chairman of Beeland Interests Inc., told journalists at a briefing in Sydney today.

Farmer, 62, was previously joint chief executive of MG Plc, formerly the world's largest copper-trading company. Farmer didn't respond to an e-mail seeking comment today. The Wall Street Journal reported Feb. 2 that Red Kite asked investors to give more notice before they withdraw from the fund.

``If investors accept a much-longer redemption period, it wouldn't be a problem,'' Robin Bhar, a London-based analyst at UBS AG, said today by phone.

Copper prices on the London Metal Exchange declined for a sixth consecutive month in January as global inventories increased of the metal, used in wires and pipes.

Money managers have been buying longer-dated metals futures on the London Metal Exchange, expecting rising returns, Bhar said. LME copper trades as far as 63 months forward.

Prices of copper for deliveries in 2010, which are well- bought by funds according to Bhar, have fallen in the past three months. The contract for delivery in December 2010 dropped 23 percent to $3,845 a ton as of today, from $5,020 in November. The same contract was at $3,230 a year ago.

Copper Bulls

``It depends a lot on timing,'' Bhar said. ``If you bought these positions a year ago when prices are much lower, you would have made profits.''

Lilley said on Jan. 20 that prices will rebound on rising industrial and housing demand in China and the U.S. The metal has fallen far enough from its May record to have reached ``fair value,'' and investors should buy now, Lilley said then, in an interview in Shanghai. Prices have since fallen 4.6 percent and last week traded at the lowest since March.

Copper gained $35, or 0.7 percent, to $5,380 a metric ton at 2:53 p.m. on the London Metal Exchange. Prices are down 39 percent from their May record.

Two hedge funds shut down last year because of wrong-way bets in commodity markets. Amaranth Advisers, based in Greenwich, Connecticut, lost $6.6 billion on gas trades, the biggest hedge fund collapse. MotherRock LP, a $400 million fund in New York, also shut after bad bets on energy prices.

Hedge-Fund Returns

Red Kite Metals is one of three funds run by RK Capital. The Red Kite Compass Fund, which was started in January last year, gained 107 percent in 2006, according to an investor letter.

Farmer, also based in London and who has traded metals for about 40 years, started Red Kite with Lilley and 41-year-old Oskar Lewnowski III. Farmer worked at Philipp Brothers and started Metal & Commodity Co., a unit of Germany's Metallgesellschaft AG in 1999. The company, which became MG after selling shares in London, was bought by Enron Corp. a year before the Houston-based energy company went bankrupt.

Lilley previously worked at Cargill Inc., Philipp Brothers and Metal & Commodity Co. Lewnowski worked at Sudamin Metal & Commodity Ltd., Credit Suisse First Boston and Deutsche Bank AG.

Hedge funds are private pools of capital that allow managers to participate substantially in the gains of the money invested.

Commodity-trading hedge funds returned between 13 percent and 23 percent last year, according to the 100 commodity funds tracked by London-based NewFinance Capital LLP. Investments in such funds doubled to $24 billion last year and may rise 25 percent in 2007, according to NewFinance.

To contact the reporter on this story: Saijel Kishan in London at [email protected]
Last Updated: February 5, 2007 09:58 EST