Thursday, May 16, 2013

A Commodity Manager Wins Whilst Losing

A Commodity Manager Wins Whilst Losing

Three or four years ago, commodities were considered a “sophisticated” form of investing.  Institutional investors of all types and sizes attended conferences focused on the benefits of commodities exposure.  Money managers mounted podia to tout their stellar returns and the benefits of diversification.  They also filled movie screens with compelling pictures of soaring commodity funds and indexes and a languishing stock market.  Just about the time that commodity managers had lassoed tens of billions of dollars in institutional money, the strategies stopped working.  Today many of those funds are in liquidation, and investors are totaling up their losses.

To Do List (1999)

I often write about the asymmetric risk of alternative investing, where investors lose while the managers win.  Commodities turn out to be a great example.  In the last few days, I’ve run across Clive Capital.  The founder, Chris Levett, came from an impeccable background, having managed commodities for Moore Capital.  On the back of early success, he closed his fund to new investors in 2009, having attracted $4 billion in assets.  He charged a hefty fee of 2.5%, plus 25% of the profits.

Then Mr. Levett lost his touch in one bad week of trading oil contracts and dropped $400 million.[1]   His fund began to suffer losses and the commodities boom went bust.  As Clive Capital’s clients redeemed their faltering investments, Mr. Levett graciously agreed to cut the fee to 2% and 20% of the profits.[2]  Even with that concession, the fund continued to shrink, and now stands at only $1.3 billion. 

Of course, institutional investors are undaunted.  Instead of jetting to commodity conferences, investors are now hearing the sweet song of credit investments.   While a different set of managers is filling the panels, the message and the slides say the same thing: better returns and diversification.  Indeed, returns for the past couple of years have been stellar.  However, by the time institutions have enough conviction to make a meaningful bet, credit will follow commodities into the doldrums.

Thanks to the U.K.’s Company House, which collects financial data on money managers, we can get a picture of the financial rewards money managers receive even as their funds shrivel.   Three years ago, Mr. Levett took home $135 million, which dropped to $61 million the following year[3] and then to $34 million this past year.[4]  How will he make ends meet?    While his investors lost out, Mr. Levett managed to enter the pantheon of hedge fund managers in Europe at number 15 with an estimated net worth £250 million ($375 million).[5]  Here’s the ultimate proof that your investment strategy doesn’t have to succeed in money management in order for the manager to win.

At least one guy doesn’t have to worry about his retirement security.

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