The closure of Ospraie Manage-ment LLC’s flagship hedge fund is likely to be the first of several such failures, as a slump in commodities and a spike in financial stocks catch out funds with hard-to-sell positions.
Five years of soaring commodity prices have encouraged a flood of investor assets and a raft of new hedge funds that have sought investment opportunities in an increasingly crowded sector. However, the recent setback in commodity and energy prices, driven by concerns that demand for resources will suffer as economic growth slows, has seen many managers take substantial hits.
Those in illiquid positions face a big headache as nervous investors look to withdraw their money at the first opportunity.
“I think there will be more problems,” said one manager who requested anonymity in order to speak candidly. “It will be an issue for hedge funds with quarterly redemptions who have gone into illiquid positions. It was not too dissimilar to the dot.com boom, where larger players bought a lot of smaller companies without too carefully considering them, (although) there is underlying value in the commodity and energy sector.”
In early September, Ospraie said it could take up to three years to return the most illiquid 20% of its assets to investors. Performance issues have already been seen at RAB Capital’s previously top-performing hedge fund RAB Special Situations, which invests in small-cap mining stocks. These tend to be harder to sell than shares of larger companies.
“It was pretty much a one-way bet in the second half of last year,” Randal Goldsmith, director of fund research at S&P Fund Services, told Reuters. “We’re now seeing sharp corrections in commodities….It can be very damaging. There are hedge funds that have taken significant positions in commodities and it if did prove to be a bear market a lot of hedge funds would be in trouble.”