* Fund fights to stay in game after fresh losses in May and
* Only "hindsight" will tell if plan to defend capital will
By Barani Krishnan
July 12 Unlike some of his peers, Michael
Coleman is not throwing in the towel after a bruising 18 months
during which his Merchant Commodity Fund lost two-thirds of its
But after recently hitting another bad patch of volatile
oil, grain and soft commodity prices, the veteran trader and
co-founder of Merchant doesn't know how long investors will keep
him in the ring.
"We're not thinking about closing shop," said Coleman, who
gave up his trading role to focus full-time on managing risk at
the start of the year. The challenge now: Halting the investor
exodus that partly shrunk the Singapore-based fund from $1.5
billion at the start of 2011 to less than $500 million now.
The former Cargill trader is frank about whether it will
work: "We'll only know with hindsight," he said in a telephone
interview from the Singapore office of Aisling Analytics, the
holding company for Merchant, which he founded eight years ago
with ex-Cargill colleague Doug King.
Simply staying in the game is in some way an accomplishment.
Two big commodity funds in London, BlueGold and Fortress, closed
earlier this year after impatient investors pulled out. Natural
gas trading legend John Arnold, in Houston, called it quits
after struggling to break even.
The year got off to a promising start for Merchant.
After a 4 percent loss in January, the trading team led by
London-based King produced three straight gains in range-bound
markets, taking returns to a positive 11 percent through April.
Then came May's brutal sell-off across markets, which pulled
the Thomson Reuters-Jefferies CRB index for commodities
down 11 percent that month alone. June was also tricky, with
prices mostly sliding before a violent snap back in the final
trading session pushed the CRB up 4 percent for the month.
"June was not so much a game of two halves, but rather 85
minutes versus 5 minutes," Coleman told investors in a letter,
using a soccer analogy.
Merchant, which trades in energy, agricultural and soft
commodities, slipped back into the red after losing 15 percent
for May and June combined. It is down 5 percent for the year
now, the letter to investors shows.
According to Chicago-based Hedge Fund Research, commodity
hedge funds, on average, were down nearly 1 percent through May.
HFR data for June is not available yet.
Coleman, the son of an English plumber who joined Cargill
right out of Oxford University in 1982, and King, a fellow
Briton who used to trade petroleum for Cargill, had built their
reputation as commodity managers over the years.
One of the sector's earlier commodity-specific hedge funds
and one of the few based in Asia, Merchant ran up a strong
record initially: Launched with just $10 million in June 2004,
it posted a near 50 percent gain in 2006 and was managing upward
of $2.5 billion by early 2008. It continued its impressive run
through the financial crisis, returning 24 percent in 2008, 5
percent in 2009 and 28 percent in 2010.
Its winning streak ended last year. It began the year with
about $1.5 billion but lost about a third of that after wrong
bets on commodities such as sugar and vegetable oils.
Investor redemptions then took another half a billion
dollars out of the fund.
"We've never tried to convince anyone not to take their
money out," Coleman said.
"But we do ask people whether they are redeeming because of
us or the world," he said. Lately, he said, the answer seems to
be the latter.
Redemptions, which that have slowed to $50 million since
January, are "not particularly a function of our performance but
rather a function of investors themselves cutting back on risk,
like European fund-of-funds that may be under pressure," he
Merchant's dismal showing, and Coleman's new role as risk
manager, were first reported by Bloomberg in February.
Other funds hit by redemptions have bowed out.
BlueGold, run by former star oil trader Pierre Andurand of
Vitol, lost 35 percent last year after posting an annual gain of
200 percent at one time. It liquidated with less than $1 billion
in April, after managing $2 billion previously.
Fortress Commodities, part of U.S. based Fortress
Investments Group, lost nearly 13 percent through April
and closed with less than $500 million, compared with its $1
billion capital at the start of the year.
For their turnaround strategy, King and Coleman, with the
help of an external risk consultant, split up the different
commodity sectors and assigned risk levels on a daily basis for
the five-man trading team at Merchant. They also formed a
contingency plan for outsized market moves.
Merchant's value-at-risk (VAR), an industry measure for the
maximum assets a trader is willing to risk in a day, has fallen
from a peak 3.9 percent in November 2010 to below 2 percent now.
Coleman said it was still early to conclude if the strategy
But he and King like the fact that volatility in the fund's
weekly returns has dropped since they began defending capital
more aggressively. Before May, win rates also improved to six
out of every 10, versus just four at the end of last year.
Coleman said his own analysis of 2011 showed the fund was
not quick enough to shed risk in the mid-May to mid-June period
-- when the CRB fell between 3 percent and 6 percent -- and
again in July to September -- when markets were basically moving
"With hindsight and reflecting on what happened, we should
have worked a lot, lot harder to constrain the downside of the
fund to no more than something in the 20-25 percent range."
"We're probably going to have a bit of the same issue over
July to August this year: Should we be thinking very defensively
or should we be focused on upside opportunity?"