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How One Commodities HF Proved Its Metal
How does an energy-investing hedge fund avoid the meltdown that burnt Amaranth Advisors? It’s all relative – as in relative value strategy, according to Julian Barrowcliffe of Anglian Commodities Fund.
How does an energy-investing hedge fund avoid the meltdown that burnt Amaranth Advisors? Its all relative as in relative value strategy, according to Julian Barrowcliffe of Anglian Commodities Fund. The nearly half-billion dollar fund operated by VegaPlus Capital Partners spared itself and its investors king-size losses by pulling out of the natural gas market about a year before Amaranth tumbled to earth on its bad bets. "We decided natural gas was rather hot to handle," Barrowcliffe told Bloomberg News, adding that there was a lot of money chasing returns in that sector and "everyone was tripping over each other." Metal seemed like the safer bet and indeed nickel, zinc and copper have been among the best performing commodities this year. Using the relative value strategy, Barrowcliffe said in his interview, "The price moves clearly helped to create anomalies that we were targeting to exploit." And exploit he did, as Anglian has been flying, up 11% last quarter, while the Goldman Sachs Commodity Index sank 16%. About 25% of 100 commodities hedge funds use relative value strategies, but its not a foolproof approach. "History tells us that commodity markets, particularly energy, are cyclical and prone to booms and busts," Matthew Evans of New York-based NERA Economic Consulting, said to BN. "We have see that price relationships can blow up, very quickly and very decisively."