Ospraie Hedge Fund Muffs Metals Rally

It's down 10% year to date on bad copper and silver bets.
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Surging commodity prices have enriched much of Wall Street this year, but not investors in Ospraie Management.

At the end of April, the $4 billion hedge fund group, which specializes in betting on metals and other commodities, was down a little more than 10% for the year in its flagship fund. People familiar with Ospraie say the fund has taken a beating this year due to a series of bearish bets on the price of copper and silver, both of which are soaring to new heights.

Sources say Ospraie was net short on copper and silver until recently. Earlier this week, the

Financial Times

reported that Ospraie was closing out many of its short positions in copper and that the hedge fund's short-covering had fueled an additional spike in copper prices over the past few weeks.

A spokesman for Ospraie declined to comment on the fund's performance, saying that "as a matter of policy, the fund doesn't comment on performance or our strategies.''

The fund's bad start to the year hasn't led to any wave of investor redemptions. People familiar with Ospraie, which also has about $1 billion invested in stocks, say most investors are subject to a so-called lockup provision that bars them from pulling out their money.

But the poor performance at Ospraie is a bit of a shocker, given the 45% gain this year in the Commodity Research Bureau's Metals Index. It's even more surprising in light of the sterling reputation of Ospraie's founder and senior portfolio manager, Dwight Anderson.

The 38-year-old Anderson is a veteran of Tiger Management, the now-closed hedge fund that was led by legendary trader Julian Robertson. He later moved to Tudor Investment, a $15 billion fund, before leaving to go out on his own.

Anderson scored a coup last spring when he sold a 20% equity stake in Ospraie to

Lehman Brothers

(LEH)

. The Wall Street firm paid about $80 million to capture some of the profits from the hedge fund.

Lehman spokesman Randall Whitestone declined to comment on Ospraie's performance.

Sources say several international banks also have incurred trading losses due to the spike in metal prices.

Sol Waksman, president of the Barclay Group, a hedge fund tracking service for commodity traders, says it's hard to find any hedge fund that's not making money from trading metals this year. Gold funds are doing particularly well, with many up more than 50%.

But Waksman says in a market as hot as the current one, he could see how a bearish trader could get blindsided.

"This price boom in industrial and precious metals has been explosive,'' says Waksman. "If

hedge funds are looking at prices from a value basis, they may feel it is overdone. But getting in front of freight train is always risky, and these prices are moving like a train."

A person familiar with Ospraie says Anderson ran into trouble this year because his trading models for copper and other metals didn't take into account that the big surge in commodity prices would draw in so many speculative investors.

"These are value-oriented guys, but these markets have been going insane,'' says the source. "There's been such a rush of money into the sector.''

Anderson's boosters note there's still plenty of time left in 2006 for Ospraie to right itself.

In fact, that's what happened over the past few months with Canada's

Leeward Hedge Funds

group. The Toronto-based fund's Leeward Offshore Resource Fund, which mainly invests in stocks of mining and natural-resource companies, was down 6% going into March.

But a strong performance the past two months has left the Leeward fund flat for the year.