Hedge funds and commodities

RAB Capital wins a vote to freeze redemptions for three years, relieving pressure on – at least some - mining stocks.

JOHANNESBURG - 

Amid a growing chorus - amid global markets mayhem - that mining stocks are both undervalued and oversold, increasing numbers of hedge funds, like certain kinds of banks, are being weeded out of the system. In the latest move, a hedge fund has effectively been nationalised by its owners, much as governments may nationalise failing or failed financial entities.

London-based RAB Capital overnight Monday won a vote required to freeze redemptions on its flagship hedge fund, which had contracted in value from USD 2bn in December 2007 to USD 790m on 25 September this year. The RAB Special Situations hedge fund, a heavy investor in mining names, both listed and unlisted, such as Falkland Oil and Gas, African Minerals, and Oxus Gold, was facing closure amid growing numbers of investors demanding redemptions. 

Stress fund selling such as could have previously been the case in the instance of the RAB Special Situations fund can place enormous weight on the value of listed stocks in which it is invested; worse still, the depression of just a few sector names, here, mainly mining names, can easily develop into wider selling, when other negative factors are at play, which has been the case for resources stocks from mid-May this year.

During Monday's panic-driven market sessions across the world, driven primarily by credit market fears, investors expressed additional concerns over stressed hedge fund selling, with the pending RAB Special Situations vote, to be conducted on the Cayman Islands, seen as yet a further aggravation. Known hedge fund "favourites" were especially badly hit on Monday, not least ENRC, Vimetco, Kazakhmys, Xstrata, and, further afield, Teck Cominco.

RAB Special Situations had initially invested around 80% of its funds in natural resource companies, but later diversified by taking stakes in entities such as A1GP, a would-be rival to Formula One, and 35m shares in Northern Rock, the UK mortgage lender recently nationalised by the government.

The RAB Special Situations fund announced a restructuring strategy during August, on the back of the massive drop in its underlying value, and increasing investor redemptions. RAB Special Situations had been a popular investment vehicle, not least after the family of Lakshmi Mittal, a steel tycoon, took a 10.4% stake, at a cost of USD 200m, in December 2006. It was agreed that the stake would be tied up for at least three years.

RAB Special Situations is a story that is available in the public domain, in contrast with the more opaque operations of the majority of hedge funds, and also traditional "old time" speculators. However, a number of other resources linked hedge funds have made news this year. In February, MF Global, the world's largest commodity futures brokerage, lost USD 142m thanks to a rogue - of all things - wheat trader.

In July, US energy trader SemGroup collapsed after encountering USD 3.2bn in bad bets on oil prices, which peaked and blew off starting on 15 July. In August, Ospraie Management was forced to close its flagship USD 2.8bn commodities fund.

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