Hedge Funds Weather Mad-Cow Case - TheStreet

News that mad-cow disease turned up in a Washington State cow had commodity trading hedge funds scrambling a bit on Christmas Eve morning, but traders took the fall in cattle prices in stride.

Commodity trading advisers, hedge funds that trade futures contracts in a wide array of markets, spent the morning before the holiday charting the effects of U.S. Secretary of Agriculture Ann Veneman's announcement that a single cow from the tiny town of Mabton, Wash., had tested positive for the disease.

Cattle contracts started the day trading limit down, corn and bean markets also started down, but news of Asian import bans gave a boost to the Australian dollar, which is linked closely to the national agricultural output.

"Well, you buy the rumor and sell the fact," said Mark Stratton, president of Beacon Management, a Princeton, N.J., hedge fund. "There's always going to be some overreaction, but as the facts become more well-known, the prices will recover."

Most commodity trading funds use momentum trading models, and that strategy has a short-term vulnerability to sudden price movements.

While Stratton said his own cattle contracts were taking a beating, commodity trading funds hedge not only by going long and short, but by spreading their risk.

"This type of thing happens in our industry on a regular basis, which is why we trade in 30 or 40 different markets. There are unexpected freezes for citrus products, cancellations of export deals. Diversifying is the key to not letting these overwhelm your portfolio."

Tim Rudderow, president of Mount Lucas Management, another Princeton commodity trading fund, said he saw "measured responses" in the slight morning falls of meat-production-related stocks, such as

Tyson Foods

(TSN) - Get Report

and

Smithfield

Foods

(SFD)

.

He said if the Department of Agriculture suspended the use of bone meal in animal feed, soybean meal futures would see an upturn, and noted that major producer

Bunge

(BG) - Get Report

, which he owns, started the day trading up 69 cents.

Though he said his portfolio would survive the price disruptions, the mad-cow announcement did disrupt his holiday plans. "I wasn't going to come in today," he said.

Jeff Hendrickson, a portfolio manager at Argosy Asset Management, said he was in a better position than many, because he had gone short on April cattle contracts about three weeks ago, leery of their high prices.

"Right now, I'm fairly pleased. My problem is that I've got too few shorts," he said, predicting a bottom of 76 cents a pound for April contracts.

He said that after Asian countries banned the importation of U.S. beef, the big winner would be the Australian dollar, which climbed to 0.743 against the dollar in early trading today, up from its close at 0.736 yesterday.

He also predicted a drop in hog prices but said that would change as consumers looked to pork as an alternative to beef.

In Kennewick, Wash., the largest town near the farm where the infected cow was found, John Cimmiyotti, branch manager of the Raymond James brokerage, said his clients hadn't begun to react to the news.

"A lot of restaurant stocks are taking a beating," he said.