Thursday, June 19, 2014

Andurand Capital Responds to Critics

Following my review of Kate Kelly's book, The Secret Club That Runs the World, a hedge fund investor questioned the performance of Bluegold, claiming its net IRR might be negative.

That elicited the following response from Hakon Haugnes, partner and COO of Andurand Capital:
I noticed your article of June 13th about Kate Kelly’s book and Pierre Andurand. I would like to highlight that there are a number of factual errors in the book, particularly relating to position size and descriptions. However, of even greater concern to me is the postscript that was published to your article following a conversation with one of your readers as this contains significant inaccuracies and unfounded allegations about Pierre Andurand and BlueGold.

I would like to make it clear that nobody “piled in” at the top of BlueGold. In percentage terms, BlueGold had an annualised return of 34% even after the last year’s loss, and in dollar terms the return was in excess of $1B. Further, after BlueGold shut down, all investors were offered their high watermark in the new fund, so the shutdown was not in any way an attempt to escape losses or “get a new lifeline”. (So far the new fund has returned over 32% net for these legacy investors and not charged any performance fees. We believe we have always acted honourably and fairly to our investors and will keep doing so going forward).

Brian Hunter of Amaranth lost about 300% of his AUM in his last year, so this is in no way comparable to BlueGold and Pierre. (Pierre’s return since 2004 is over 2000% cumulative, 45% annualized, and his biggest loss was 34.8% in 2011 which is now being largely recovered)

I hope you may see that based on these facts, the postscript information is shown to contain poorly considered comparisons and comments. Although the postscript may represent simply a “throwaway” comment these incorrect assertions are obviously damaging to Pierre’s reputation so we are hoping that you may remove it, or at least post my comment so that both sides of the argument are represented for your readers.
The hedge fund investor came back to me yesterday to concede he made a mistake:
I stand corrected. You can remove my original comment. There were exaggerations.

They're right. I double checked and there were more inflows at the beginning and later at the end than what had been represented to me. It's only dollars invested in 2011 that experienced negative IRR. Between Dec-10 and Apr-11, they had perhaps $300M in net inflows or roughly 15% of the assets in the main fund. And that's when the high water mark was hit. That $300M or so, if it stayed until the liquidation was announced, was down 40%. 2008 and 2009 dollars invested definitely enjoyed super IRR. Unclear about 2010. I have no access to audited track record prior to that so my comments only applied to the BlueGold track record.

Kudos for granting the high water mark for investors who re-underwrote Pierre.

As for the comment concerning the parallel between BlueGold and the Amaranth of the later days, it is more a function of where both managers were on the risk appetite spectrum judging from the volatility of their monthly returns and the breadth of their investible universe. They were both in the 5th percentile. And that tends to be toxic.
I enjoyed this exchange and think it's only fair to include it so that Andurand Capital can state its case. I went back to read a chapter in Kate Kelly's book, The Wilderness Year, where she went went over why Pierre Andurand and his former partner Dennis Crema decided to close BlueGold in 2012 and return the money to investors.

Following that experience, Andurand pondered his next move. On page 139, Kelly writes:
[Andurand] spent the next few months preparing to launch his new hedge fund. Depending how well the fund-raising went, he was willing to put up to $100 million of his own money into the business, but he hoped some of his old investors would support the new venture. To help attract them, he had offered to forgo his own cut of the new fund's profits until they made back any money they lost at BlueGold -- a move known in the hedge-fund business as transferring the high-water mark. It was a tough standard to meet, but money managers at Citadel, the large Chicago fund group, had recently done it, and Andurand figured he could too.
To his credit, Andurand transferred his high-water mark, which is more than I can say for many hedge fund clowns who close shop and reopen a new fund under a new name and try to sucker in new investors because they burned their previous ones.

According to Futures, a few well-known commodity funds closed in 2012 and 2013, and things aren't getting better. The FT reports that Schroders’ Opus commodities fund, which contained $2.3bn at its peak, is closing after assets dwindled to hundreds of millions of dollars.

Bloomberg reports, Chris Levett, who shut his commodity hedge-fund firm in 2013 after it posted almost three straight years of losses, plans to return to the industry with billionaire Louis Bacon’s Moore Capital Management LLC.

Will the tide turn for commodity funds? According the HSBC, India's new government may be the catalyst for the next global commodity supercycle. I'm highly skeptical and think challenging markets for commodity funds will persist for many more years.

But this doesn't mean that investors should ignore active commodity managers, especially ones like Andurand who have a proven track record in printing money. I wouldn't bet the farm on him as his ostentatious lifestyle is a source of concern (he should be more humble like his parents), but journalists tend to exaggerate things and he definitely knows how to trade commodities, especially crude oil, and I would want to know his views on markets.

By the way, my own thinking is that oil prices will go higher and then come crashing down once the next crisis hits and deflation sets in. It will be a replay of what happened in 2008 except this time, once oil prices come down, they will stay low for a protracted period.

I leave you with another review of The Secret Club That Runs the World, from the FT's Gregory  Meyer:
On March 28 2011, Delta Air Lines delivered a plea to Washington. Traders with no business in the oil market were pushing up the price of the 4bn gallons of jet fuel Delta burnt each year. The Commodity Futures Trading Commission needed to stamp down on the speculators, the carrier argued in a letter, or risk “concrete detrimental consequences for the real economy”.

The company was a classic “commercial hedger”, in the parlance of commodities markets. It used futures to lock in fuel prices at places such as the New York Mercantile Exchange. At the time, oil was spiking for the second time in four years and airlines blamed financial investors herding on to the Nymex.

Delta’s antipathy towards speculators was soon to change, as Kate Kelly reveals in The Secret Club that Runs the World. In April 2011 Delta hired Jon Ruggles, a cocksure veteran energy trader, as vice-president of fuel. Facing a shortfall in an employee bonus pool, managers authorised Ruggles to pursue a “purely speculative trade” in heating oil that would make Delta $100m.

The airline’s bet confounds the policy debate that has raged around commodity markets since oil, metal and grain started streaking higher about a decade ago. Washington and Brussels want to reduce speculators’ influence in futures markets, convinced they can distort prices for basic materials. But if hedgers also use futures to speculate, how will regulators know whom to curb?

Kelly, a reporter at CNBC, explains complex trading strategies through lively stories about Ruggles and a handful of other high-flying western commodities trading personalities from New York to London to Zug. They include Pierre Andurand and Jennifer Fan, both hedge fund managers, and Alex Beard, global head of oil at Glencore, the giant commodities trading house. While few names will be secret to readers of the financial press, Kelly digs up vivid details of their behaviour during times of extreme market stress.

We learn how Beard “put on a massive speculative bet” that oil prices would fall in 2008 – as they did, decisively. We are told how Gary Cohn – now president of Goldman Sachs – built “enormous caches” of aluminium in the early 1990s that drove up prices, foreshadowing Goldman’s controversial entry into metals warehousing. Traders seem to make as much money when prices fall as when they rise, often via arcane structures with names such as “cap-swap double-down extendable”. This complexity underscores the challenge for regulators such as the CFTC, which meets next week to discuss speculation limits.

At times, The Secret Club feels a bit breathless. Traders are cast as “shrewd and indomitable” representatives of a world in which “a relatively small circle of powerful players take enormous risks gambling on the future price of physical raw materials like oil, corn, and copper”. Some of the details Kelly seizes on to bring her subjects to life – a penchant for designer jeans, say, or for grouse hunting – could seem unremarkable in another context.

The author can also be glib on why commodities markets rallied until mid-2008, crashed and then rallied back, in some cases to fresh records. “The commodities bubble of the 2000s is a snapshot of one of the most extraordinary periods in American finance, providing an object lesson on the role of markets, regulators, and how the money world can sometimes lose its connection to the real one,” she writes in chapter one. More than 200 pages later, this lesson is unclear. The roles of hedge funds and commodity index investors receive more attention than obvious factors such as the doubling of Chinese demand for oil over that decade.

In the three years since Kelly began reporting The Secret Club, commodity markets have become rather boring. Banks are pruning operations. Specialist hedge funds have closed. Volatility is depressed.

Meanwhile, the world is still guzzling more commodities. As the energy and metals trading house Trafigura argues in its annual report, the outlook “has not changed in any very significant way from the one that prevailed before the financial bubble burst in 2008”. Kelly’s engaging review of the previous decade may also serve as a guide to future tumult.
John Tamny of Forbes wrote a more critical review of Kate Kelly's book, Do Commodity Traders Really Run The World?, where he writes:"... beyond a title that is belied by her own reporting, the book is incomplete." Tamny rightly notes that Andurand didn't leave Goldman because he was stymied by strict risk controls. The book portrays Andurand as being a huge punter but the truth is he implemented sophisticated risk management and cut the risk when he started his new fund.

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Below, Global Commodities Managing Director Greg Smith discusses the implications the violence and unrest in Iraq has on oil and other commodities with Rishaad Salamat on Bloomberg Television’s “On The Move.”