On a drizzly morning, Michael Farmer stepped to the pulpit to deliver a stern message to fellow parishioners at St. Helen’s Bishopsgate, an 800-year-old church in the shadow of the London Metal Exchange and in the heart of the City, London’s financial district.
“We live in a cursed world — cursed by God,” Farmer told the men and women who fill the church, most of them workers in the financial industry. “We live in a broken society; we have broken nations. Look at the euro zone. Life is a struggle and, in the end, is death.”
Yet, Farmer said, Jesus will provide salvation from the daily hardships of disease and poverty — and the firings that have left thousands of City workers unemployed, he preaches.
Farmer, 67, is a Conservative Evangelical. He also runs London-based RK Capital Management, a metals-trading hedge fund firm with $1.3 billion of assets under management. Its $400 million Red Kite Compass Fund tops Bloomberg Markets’s ranking of mid-size hedge funds for the first 10 months of 2011, with a return of 47 percent, investors said.
The $200 million Red Kite Metals Fund rose 34 percent, and the $100 million Red Kite Prospect Fund surged 50 percent, clients said.
RK Capital specializes in the buying and selling of copper and prospered by betting that the price of the red metal would fall in 2011 as the pace of construction in China slowed, investors said. The assessment proved correct, with copper retreating 26 percent from a record $10,190 per metric ton in February 2011.
Farmer said his faith makes him a better money manager by keeping him humble. The firm’s offices match his humility, featuring a simple orange sofa in the reception area, gray carpeting and walls free of art. There is no receptionist; visitors press a button on the coffee table to let Farmer and Red Kite’s other co-founder, David Lilley, know they are there.
“Jesus warns us that there are many dangers to money,” Farmer said. “I know that in my heart there is greed, there is wanting just a little bit more. It helps that the Bible tells me to be wary of this and that one day I will fall off my perch.”
Farmer is active in politics, too. He has given millions of pounds in donations to Britain’s ruling Conservative Party, saying it has done more than rivals to promote family values.
Farmer and Lilley, 45, aren’t just owners of futures and options contracts tied to copper; they also trade the physical metal, buying the commodity in North and South America, storing it in warehouses around the world and selling it when the price is right to companies that turn it into the wire and pipes used in the construction of homes and vehicles.
Farmer previously ran MG, which before its sale in 2000 was the world’s biggest copper trader. Lilley also worked at London-based MG. Farmer used that experience as a marketing point when he started RK Capital in 2005.
Physical trading also formed the backbone of what was once the firm’s biggest hedge fund, Red Kite Metals, which oversaw more than $1 billion at its peak, investors said. The fund — named after an endangered bird of prey that is native to Europe and North Africa — proved as volatile as the prices of the metals it buys.
Investors said Red Kite Metals surged 188 percent in 2006 on the back of a global commodities boom. It then plunged 50 percent in 2007, rebounded with a 19.8 percent rise in 2008, then fell 0.9 percent in 2009 and 25 percent more in 2010, when Red Kite’s bet that copper would decline proved premature.
Clients fled the metals fund, reducing assets to $200 million as of November, investors said.
Farmer said that from 2008 to 2010, the Federal Reserve buoyed markets, including those for commodities, by pouring billions of dollars into the economy. At the same time, he said, analysts mistook China’s aggressive buying of copper as a sign that its construction boom was continuing, when the Chinese were actually stockpiling the metal.
The sluggish world economy makes Farmer a pessimist. “The world is in a bad place,” he said. “We are still fighting to recover from a very serious recession, and I think it is going to go on for another four or five years.”
One reason the assets of Red Kite Compass surged ahead of Red Kite Metals is that Compass deals only in futures and options, not the physical metal.
“We avoid physical games because it includes other risks and is less liquid,” said hedge fund investor Marcus Storr of Feri Trust, whose firm manages $20.4 billion. “We’d rather stick to hedge funds trading mainly in equities of commodity companies and financial derivatives.”
Success in forecasting copper sales and prices depends on an understanding of the Chinese market, which consumes 39 percent of the world’s copper, according to Morgan Stanley estimates. RK Capital is involved in transactions that account for up to 15 percent of China’s supply in a given month, Farmer said.
“At Red Kite, you are dealing with people who have many years in metals, with great expertise in China and the physical world,” said Robin Bhar, a metals analyst at Credit Agricole in London. “What you can get from the physical market in terms of flows and views helps immensely to form a view in trading.”
Ren Gang, head of research at Shanghai-based Maike Futures, said Chinese copper demand could be weak in 2012 because local companies can’t borrow money for real estate projects.
“Companies are short of money as credits are very tight,” Ren said. “There’s not much restocking of copper.”
Ren’s company is a unit of Maike, which imported 600,000 tons of copper into China in 2010. In 2008, Maike partnered with RK Capital to set up an investment fund in Hong Kong.
Not everyone is bearish.
Goldman Sachs Group analysts Max Layton and Allison Nathan said market jitters in Europe have led traders to take their focus off the fact that copper supplies are under pressure.
Strikes by workers in Latin America have created a copper deficit, which will trigger a “strong rally” in the second quarter of 2012, the analysts wrote in a Nov. 20 report.
Copper rose to a one-month high of $7,820 a metric ton in London trading after analysts, including Royal Bank of Scotland’s Nikos Kavalis, predicted China will ease its monetary policy in an effort to spur growth.
Some Red Kite funds have been volatile. Hedge funds with big performance swings risk pushing away institutional investors, such as pension funds and insurance companies, said Neil Campbell of the brokerage firm Tullett Prebon.
“It’s very hard for an institutional investor to be convinced that a fund that is up 100 percent in any year is able to manage the downside risk,” Campbell said. “Very few investors will have the stomach to deal with that volatility.”
Some of the volatility stems from the rapid growth in metals trading. Copper and other industrial metals bought and sold on the London Metal Exchange rose to $11.6 trillion of contracts in 2010 from $2.5 trillion in 1999.
The assets of hedge funds that trade metals rose to $86.8 billion in the third quarter of 2011 from $13.4 billion for the same period in 1999, said BarclayHedge, a data provider.
RK Capital earned a net $179.6 million from 2006 to 2010, with the profits distributed to its four partners — Farmer, Lilley, Oskar Lewnowski III and a firm the three men control called RKX Services, according to government filings.
New York-based Lewnowski, 46, a former Credit Suisse investment banker, oversees a $400 million fund started by RK Capital that provides financing for mining projects in return for the right to buy metals pulled from the ground.
Farmer said he once asked his church rector if he should give up finance and go to theological school. The rector told him the finance industry also benefits from the presence of Christians.
Lilley said he sees little conflict between work and the faith he shares with Farmer.
“God wants you to use your talents in the appropriate way,” he said. “If by the grace of God we can do something in business, then great, but try to make sure your faith also guides how you trade and the use of any proceeds.”
Farmer and Lilley said they are sympathetic to the people who set up encampments in the vicinity of financial centers around the world to protest disparities in wealth between the barons of the financial system and ordinary citizens.
“There is a problem, and I am not sure that problem is going away,” Lilley said. “Those with resources can either use them to create jobs and employ people or they can blow them on overpriced champagne and conspicuous consumption.”
In his St. Helen’s sermon, Farmer urged his audience to stay true to their Christian beliefs even in a year when almost 10 percent of London’s finance employees had lost their jobs.
“They can fire you, and that’s really bad,” Farmer said. “They probably won’t, because if you are a Christian, you are probably hardworking and honest. But if they do, you are still with the Lord.”
The full version of this Bloomberg Markets story appears in the February issue.
For a complete list of the top 50, go to bloomberg.com/markets-magazine/
Management firm, location
| Assets, |
|1. Red Kite Compass, Michael Farmer, David Lilley|| |
RK Capital Management, U.K.
2. Quantitative Tactical Aggressive, Jaffray Woodriff
|Quantitative Investment Management, U.S.||Long/short||564.0||32.1|
|3. Zais Opportunity, David A. Deutsch||Zais Group, U.S.||Asset backed||358.2||27.9|
4. MW Global Opportunities, Fehim Can Sever
|Marshall Wace, U.K.||Long/short||474.0||25.0|
| 5. Brummer & Partners Manticore, |
David Meyer, Seth Wunder
Contour Asset Management, U.S.
|6. Friedberg Global-Macro Hedge, Albert Friedberg||FCMI Financial Services, Canada|| |
|7. BlackRock 32 Capital Master, Team managed||BlackRock Alternative Investors, U.S.||Market neutral||403.0||20.1|
|8. Saba Capital Tail Risk, Boaz Weinstein||Saba Capital Management, U.S.||Tail risk||900.0||20.0|
9. Platinum Partners Value Arbitrage Master,
|Platinum Management, U.S.||Multi-strategy||695.0||19.8|
|10. Bohong PIPE Enhanced Index, Liu Hong||Bohong Tianjin Fund Management, China||Long/short||307.7||19.4|