Commodity Hedge Funds 'Ending In Tears'

by: David Enke

We always hear about gold trades "ending in tears" due to the rapid swings of the yellow metal. As some are finding out, apparently gold is not the only commodity with a volatile price (see WSJ article). Declining prices recently have some commodity-specific hedge funds deep into negative territory.

As an example, the Ospraie Fund has suffered from bad trades on energy and natural resources stocks, resulting in a loss of roughly $1 billion from a fund that had peaked near $3.8 billion in assets late last year. The fund declined more than 13% in July alone. Back in 2006 the fund lost almost 20% from bad trades attempting to guess the direction of copper prices. Yet before 2006, the fund had returned annual gains of around 18% since 1999.

Just another reason that asset or fund returns should be compared against some type of reward-to-variability ratio, such as the Sharpe ratio or Treynor ratio, among others, to help determine if you and your portfolio can stomach the swings.

Disclosure: None