MotherRock, an energy trading hedge fund led by former Nymex President J. Robert "Bo" Collins, is imploding. The two-year-old fund, which once had about $450 million in assets under management, notified investors early Thursday that it is closing up after suffering through two brutal months, say people familiar with the fund. A copy of the investor letter, in which Collins says MotherRock is winding down because of its "terrible performance," was obtained by Bloomberg News. In May, the hedge fund posted a 2.2% loss. Things got much worse in June, when MotherRock plunged 24%, slashing its assets under management to about $280 million, sources say. The bad performance continued in the month of July, although figures for the past month weren't available, the sources say. The swift decline in MotherRock's assets may also be partly attributable to investor redemptions, sources say. MotherRock's troubles stemmed from a series of bad bets on natural gas prices made with leverage, or borrowed money, sources say. Natural gas prices have been volatile in recent months. "To be honest with you, I was sort of expecting some failures," says Harry Chernoff, a principal at Pathfinder Capital Advisors. "Natural gas prices have been going up and down 10% almost every day. It's very easy to lose a great deal of money, very quickly, under those conditions. This kind of volatility could kill a lot of funds." Up until this year, MotherRock had enjoyed some success. Last year it was up about 24%. The fund opened with $7.5 million. The fund employed about 16 people. Collins could not be reached for comment. Several people who answered the telephone at MotherRock's office in New York declined to comment on speculation about the fund's status. One person said MotherRock's office in Houston was no longer open. In a May investor update, MotherRock the hedge fund's "natural gas book was hurt primarily by a loss on volatility spread trading.'' People familiar with MotherRock say Seattle-based Silver Creek Capital Management, a so-called fund-of-funds once was an investor in the energy fund, but got out before MotherRock ran into trouble this year. An official with Silver Creek, which has $5 billion in assets invested in hedge funds, declined to comment. MotherRock, which was formed in December 2004, opened for business in 2005. Collins founded the fund with John D'Agostino, a former Nymex executive, and former Nymex trader Conrad Goerl. Carol Coale, a former Prudential Equity natural gas analyst, headed up MotherRock's research team. Coale also oversaw the operations in MotherRock's Houston office. The Nymex, the parent company of the New York Mercantile Exchange, recently filed for an initial public offering. Sources say Collins, as a Nymex past president and an exchange shareholder, stands to financially benefit from the commodity exchange's upcoming IPO.
Before joining the Nymex, Collins was a senior vice president at El Paso ( EP), where he oversaw the energy company's gas trading group. Coale once was a highly regarded analyst on Wall Street. She urged investors to sell Enron's stock months before a massive accounting fraud led to the collapse of the energy company. But Coale went on to make questionable calls as well. Perhaps sensing another Enron, she hung a sell recommendation -- and a $0 price target -- on Dynegy's ( DYN) stock in late 2002. But the shares, already below $1 at the time of Coale's downgrade, had bottomed out by that time. They soon began a climb back above $5, where they continue to hover today. The prime brokers for MotherRock are ABN Amro ( ABN) and Goldman Sachs ( GS), according to the hedge fund's marketing literature. But a spokesman for the Dutch-based bank disputes the hedge fund's claim, saying ABN Amro served only as a clearing broker for MotherRock. Merrill Lynch ( MER) also is listed as one of MotherRock's bankers. In the hedge fund's marketing literature, Collins and D'Agostino list several executives at the NYMEX as references. Collins also lists a managing director at ABN Amro as a reference.