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As a Bubble Bursts, Funds Feel the Burn
Funds that bet on sustained gains for oil, precious metals and grains instead got lashed by the volatile markets' downturn.
(Iluka Resources Via Bloomberg News)
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"As the fund's performance deteriorated, we made the decision -- despite continued confidence in the fund's positions -- to reduce risk and de-lever the portfolio significantly due to concern of incurring even greater potential loses," Anderson told investors.
The fund, in which investment bank Lehman Brothers owns a 20 percent stake, was closed after the losses exceeded a threshold that would have allowed investors to pull out money without restriction, Anderson said. Hedge funds are pools of capital that cater to institutional investors and wealthy individuals.
Spokesmen for Ospraie and Lehman declined to comment.
The fund's collapse has fed speculation that it was liquidating large positions in recent weeks, possibly adding to the severe downward pressure on commodities in recent days.
Peter Holst, managing director at Delta Global Advisors, said he was surprised at the rapid demise of Ospraie, a highly regarded fund, but said it served as a cautionary tale about the too-high, too-fast commodities cycle.
"It's disturbing to see the smartest guys in the room losing so much money in commodities," Holst said. "The problem is when your holdings are in a momentum sector, your stocks aren't based on fundamentals, so you need to be one of the first ones out, not the last."
Ultimately, unfamiliarity with the volatility of commodities may have played a factor. It's been more than 20 years since the last commodities boom ended, long before the time of many of today's money managers.
"Unfortunately, a lot of people managing vast sums of money haven't lived through this [cycle] and don't know. It hurts," Holst said.
More bad news could come for other hedge funds. Jon Nadler, analyst with Kitco Bullion Dealers Montreal, said big investors have been dumping positions in commodities since Ospraie's failure, suggesting other funds could be in trouble.
"One . . . has to extrapolate that this failure is not going to be a 'one-off' event," Nadler said in a note. "Not when considering the tens of billions that have been thrown at the commodities sector over the past several years."
Associated Press writer Joe Bel Bruno contributed to this report.
