When Harry Arora's new commodity hedge fund opens for business, investors will be putting their trust in someone who can boast considerable experience in making money with natural resources.
Arora, a former
trader and then a commodity portfolio manager at a leading hedge fund, is creating Arcim Advisors. The new fund is set for launch on Saturday and will be based in Greenwich, Conn., Arora said in an interview with
Previously, he was running the commodity desk of $7.2 billion Amaranth Advisors, also based in Greenwich and one of the 50 largest hedge fund firms in the world. He left in March. Before that, he was an options energy trader at Enron.
Now, he says he expects to raise at least $600 million on day one for his new venture. While at Amaranth, Arora applied a relative value approach to his portfolio. In other words, he was hedging his long positions with shorts in a proportion that varied depending on the market.
He said he intends to continue to manage his new fund in the same style. In fact, his model will be close to market-neutral, a style in which the manager applies the same ratio for long and short positions. "We will benefit from both up and down markets," he said.
It is not unusual for hedge fund managers to leave a heavyweight firm to create their own business. What's more intriguing is that Enron, the now defunct and infamous energy trading giant, has been a launching pad for some hedge fund managers who have set their own commodity shops, mainly in Texas. One example is John Arnold, former natural gas trader at Enron, who created Houston-based Centaurus Energy in 2002. Arnold reportedly hired Greg Whalley, a former Enron president. A spokesperson for Arnold did not return a call seeking comments.
Considering how the commodities markets got hit in May and June, Aurora's timing may raise eyebrows.
Metals and commodities have been hurt since mid-May, when markets began to fear that the
could tighten too much. The concern was that the rate hikes could precipitate the economy into slower motion and sap demand for commodities. According to index provider HedgeFund.net, the energy and CTA hedge fund indices were down 1.80% and 0.55%, respectively, in May. Data for June were not yet available, but analysts do not expect performance to be positive in the sector.
Yet signs of a vigorous rally have been emerging over the past week, especially since Thursday, when the Fed hinted that it might pause its tightening campaign after raising rates by 25 basis points for the 17th straight meeting.
Gold and other metals were sharply higher Friday amid a selloff in the dollar in the wake of the Fed's statement. Gold surged above the $600 mark, and was recently gaining $27.80, or 4.72%, to $616.70. Silver and copper also rose.
Still, no one knows for sure if the commodity rally will be long-lasting after two months of a harsh correction. Prices tumbled in May and June due to the uncertainty around the Fed's intentions. If Thursday lifted some fears, commodity traders remain dependent on inflation data and will continue to be nervous as long as the Fed has not officially put an end to its tightening cycle. The result is a very volatile market.
But that isn't necessarily a a bad thing.
"Typically, volatility equals opportunities for hedge fund managers," says Justin Dew, a hedge fund analyst at Standard & Poor's. Commodity hedge funds that suffered the most in May were those that did not hedge their bullish bets with shorts, he says. "If they were long, they got hammered," he adds. And a majority of hedge funds had a long bias in the sector before the May correction.
Arcim will go long and short, staying away from the long-only model adopted by so many hedge funds
Adding another defensive tool, Aurora says that he will create a very broad portfolio, including grains, crude oil, natural gas, gold, copper, aluminum and zinc. By diversifying his assets, the manager hopes to navigate the market with less pain than those who have only focused on one product such as copper or energy.
Some say that the timing is right for hedge fund managers to re-enter the commodity market now. "Hedge funds pulled their money off the table since mid-May and people sold into frustration," says Jon Nadler, analyst at bullion dealer Kitco. "But now, the market offers new buying opportunities." In addition, a flurry of merger and consolidation activity in the mining industry, offers new growth perspectives, he says,
The most recent example is
planned acquisition of
for $40 billion, although the transaction is being questioned by some shareholders.
Nadler said that hedge funds can continue to prosper in the commodity market due to supply and demand factors. "The market will welcome new commodities hedge funds," he says. Commodity prices are bound to go up long term, he argued, because an ever-expanding population worldwide will create a stronger demand for grains, energy and raw materials.
In addition, countries like China and India are creating "buy low and sell high" opportunities for metal traders, particularly in precious metals and copper, he adds. Finally, as commodity supplies are finite, prices should soar as a result. "Water, for instance, will become the commodity of the 21st century," he says.
The same applies to energy: "For all the investors saying, 'I told you so,' the year isn't over," says George Lucaci, managing director at Channel Capital, the firm that runs the HedgeFund.net index. "The Americans are still driving their SUV to the mall to buy cheap Chinese goods. Nothing has changed. Energy is a long-term play."
As for gold, James Moore, metal analyst at London-based Bullion Desk, says, "the market is still positive." Factors supporting gold include the uncertainty about the health of the U.S. economy, inflation fears and the fact that Central Banks, particularly China have began to increase their reserves in gold. In addition, geopolitical tensions in the Middle East and in Korea will draw back investors into gold, he predicts.
Gold has climbed steadily from $250 an ounce in the summer of 2000 to over $600 today. Moore sees the precious metal hitting the $675 level by year-end.
"Now is a good time for hedge funds to look at the commodity market again, particularly precious metals," said Moore. But again, hedge funds would be well-advised to hedge their bets.