And once again we get a reminder why the word "hedge" fund is such a misnomer. The FT reports the Clive Capital, the "world's largest commodity hedge fund" as defined by the FT (although we are more than confident various other and much largest "energy-heavy" funds would be much more appropriate for this moniker) lost $400 million out of its (paltry) $5 billion in total AUM during last week's coordinated energy take down, initiated by the forced margin intervention in precious metals. Clive "is the biggest of several big hedge funds believed to be reeling after the unexpected sell-off hit markets late last week." Clive is not alone: "Others, including Astenbeck Capital, the Phibro-owned fund run by Andrew Hall, are thought to have taken double-digit percentage point losses to their portfolios, according to investors." The FT's take: "The scale of the losses demonstrates that even the savviest investors in commodities were wrongfooted by the correction, one of the sharpest one-day falls on record." Our is slightly different: when a trade has enough momentum, and has been working long enough, even the quote unquote "savviest investors" become a momo chasing herd, with nobody hedging, and a massive drop in prices always likely to be the deathknell for some previously vaunted investor, whose only claim to fame was being lucky enough once to be at the right time and the right place, and to put a huge levered bet that worked out. And praying that he or she can recreate those conditions.
More from the FT:
In a letter sent to investors on Friday and seen by the Financial Times, Clive said it was down 8.9 per cent on the week after what it called “extraordinary” price movements on Thursday. Clive’s management said it was at a loss to explain what had caused crude oil markets to be “annihilated”.
“The move in Brent represented about a 5 standard deviation move, while WTI was a 4 standard deviation move,” Clive said in its letter. A five standard deviation daily move is a exceptionally rare event.
“Economic data was soft early in the week though micro news for oil continued to be bullish. Indeed there was news out earlier in the week of further supply disruptions in Yemen and a substantial technical supply outage in the UAE,” the fund said.
While several fund managers had been slowly positioning themselves for a correction, the speed and scale of the event caught most – including Clive – off-guard. At its low of $105.15 a barrel on Friday, benchmark Brent crude oil had dropped more than $16 in two days.
Thursday’s sell-off was started by retail and non-traditional investors taking profits – a move which triggered automatic selling from quantitative funds and precipitated a rout. The correction means Clive is now slightly down on the year, after strong performance over the first four months to April.
And now that the technical blow off has been eliminated, fundamentals - as in scarce supply and relentless demand - can once again return;
Most managers remain bullish, however, and expect commodity prices to continue to rise. “Physical markets are quite strong,” said Clive in its letter. “We remain positioned in a number of markets.”
Commodity hedge funds are used to volatile portfolio moves. In spite of similar historical setbacks, Clive has a record of returning, on average, 27 per cent on investors’ capital a year.
The fund manager was set up in 2007 by Chris Levett, a former trader at Moore Capital, the global-macro hedge fund run by Louis Bacon.
A 27% return with a negative Sharpe ratio. Sounds pretty damn swell. Luckily, for Clive, it was on the border of TBTF. Many other, smaller energy funds were not quite as lucky when the barrage of margin calls flooded their back offices on Wednesday through Friday. We are pretty sure we will learn just who they were over the next 3 days.