By Christian Berthelsen And Rob Copeland at The Wall Street Journal
Three years after private-equity giant Carlyle Group LP touted its purchase of a hedge-fund firm, a rout in raw materials has helped drive down holdings in its flagship fund from about $2 billion to less than $50 million, according to people familiar with the matter.
The firm, Vermillion Asset Management LLC, suffered steep losses and a wave of client redemptions in its commodity fund after a string of bad bets, including one tied to the price of shipping of dry goods, such as iron ore, coal or grains. At one point, two of Carlyle’s co-founders, David Rubenstein and William Conway, put tens of millions of dollars of their own money in the fund and left it in amid the losses and redemptions, according to people familiar with the matter.
Vermillion is in the midst of a restructuring, its co-founders left at the end of June, and it is pulling back from trading in several markets.
A collapsing market for raw materials is spreading pain well beyond commodities specialists to some of the heaviest hitters on Wall Street.
This week alone, commodity-trading firms Armajaro Asset Management LLP and Black River Asset Management LLC, a unit of agricultural conglomerate Cargill Inc., said they are closing funds. Several other firms that managed billions of dollars already have closed their doors, including London-based Clive Capital LLP and BlueGold Capital Management LLP. Large money managers including Brevan Howard Asset Management LLP and Fortress Investment Group LLC have wound down commodity strategies.
Assets under management at commodity hedge funds have fallen 15%, to $24.1 billion, since their peak in 2012, and nearly 30 firms out of 250 have shut down since that year, according to industry consultant HFR Inc. Commodity firms lost money for three years in a row before 2014, HFR said.
Commodities are one of the most challenging markets to invest in, because of their complexities and penchant for volatility. Some of the biggest hedge-fund blowups have involved commodity trading, such as the 2006 collapse of Amaranth Advisors LLC after sustaining more than $5 billion in losses on natural-gas trades.
Commodity prices have plunged due to a combination of factors, including a stronger dollar, an anticipated increase in U.S. interest rates and an expectation that cooling economic growth in China will undermine the country’s voracious appetite for resources. The S&P GSCI commodity index, which tracks commodity prices, has lost more than 8% this year and reached its lowest level since 2002 amid double-digit-percentage declines for everything from oil to wheat to copper to sugar.
Last year, some oil-trading firms scored huge returns when they correctly positioned for a collapse in crude prices by making bets that paid out when prices fell by 60% at one point.
But even some of the firms that were winners in crude’s tumble have been whipsawed. BBL Commodities LP, a $600 million New York firm led by former Goldman Sachs Group Inc. proprietary trader Jonathan Goldberg, was caught out by oil’s quick rebound earlier this year and is down about 15% through midyear after gaining more than 50% last year, according to a person familiar with the fund.
The losses aren’t contained to the usual bulwarks like oil or gold.
Take Andrew Lahde, the hedge-fund manager who earned more than 800% returns in 2007 betting against mortgages ahead of the financial crisis and memorably closed his firm in 2008 with a letter thanking the “low-hanging fruit, i.e. idiots” whom he traded against.
Now, Mr. Lahde’s latest venture, LCM Exponential LLC, is nursing 25% losses through midyear as it amasses the metal rhodium, a byproduct of platinum and palladium used in some cars to control pollution, according to people familiar with the firm. Rhodium has been dinged this year along with other precious metals, and securities tied to the price of physical rhodium have fallen 36% in the past year, including 28% in the past three months alone.
Mr. Lahde said he is sticking with the strategy that as production slows, prices will go up. He is storing his rhodium in a vault.
“Why would I expect anything less?” said Mr. Lahde of the price moves. “If you want to make a lot of money, you need volatility, and you need volatility to go your way.”
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Vermillion’s flagship Viridian fund ran into headwinds in 2013 and 2014, losing 23% last year, according to people familiar with the fund. The firm had a successful strategy trading securities in a market tied to the price of shipping dry goods on the high seas and ramped up its investment in it as returns improved. But that withered as the firm remained bullish even while freight rates collapsed to historic lows in the second half of 2014 and early 2015. The trade lost more than 30% in the process and the position remains in the red, though it has recovered somewhat recently, the people said.
Messrs. Rubenstein and Conway, two of Carlyle’s co-founders, invested $30 million collectively in the firm, according to a person with knowledge of its operations. The current value of their stakes is unknown.
Christopher Nygaard and Drew Gilbert, who co-founded Vermillion in 2005 and sold a majority equity stake in the firm to Carlyle in 2012, left at the end of June, according to people with knowledge of the firm’s operations. Vermillion is retreating from prior investments in oil, natural gas, coal, iron ore and agriculture, and traders and strategists involved in managing those strategies are leaving, these people said.
Sean Brennan, Vermillion’s portfolio manager for oil and energy markets, has been hired at Israel Englander’s $30 billion Millennium Management LLC, though Mr. Brennan was still listed on Vermillion’s website Friday.
Messrs. Nygaard and Gilbert declined to comment. Mr. Brennan didn’t respond to a request for comment.
Vermillion will continue managing investments in metals and freight-rate strategies, and the flagship fund remains in operation despite the low level of capital, according to people familiar with the firm.
Vermillion also has added new investment vehicles offering broad bullish exposure to a basket of commodity markets and has a new venture in commodity-finance lending that executives think can expand into a multibillion-dollar business, the people said.
In a statement, Carlyle said: “We are successfully repositioning our commodities business, particularly in commodities finance, to capture an enormous global opportunity.”
Vermillion had $2.2 billion under management at the time of the Carlyle acquisition; its assets in the legacy flagship, metals and freight funds have fallen to just over $400 million since then, though the new strategies in lending and index products have added about $1 billion. The firm’s total assets under management now stand at $1.4 billion.
