BBC News reports that another hedge fund has closed down thanks to its failure to bail out of the oil speculation trade that boosted oil to a peak of $147 in July. This is yet another piece of evidence that people like Hank Paulson, who insisted that record oil prices were due to supply and demand, were either being less than honest -- particularly since his former employer Goldman Sachs Group (NYSE: GS) was a big beneficiary of this speculation -- or ignorant of reality.
The hedge fund in question this time is Ospraie Fund, which invested in commodities like oil and gold. It "has lost 38% of its value since the start of the year." Gold is down 22% to $800 from its $1,030.80 an ounce high in March. Oil has tumbled 25% to $109 since peaking in July, according to BBC News. But 1440 Wall Street suggests that the biggest commodity culprit in Ospraie's demise was copper's tumble. The lesson here is that if a sufficient number of big money speculators get together and decide to, say, short the dollar and go long commodities, there will seem to them to have safety in numbers.
But when the government started investigating the cause of spiking oil prices, the trade got very unprofitable very fast. As I posted, the Commodities Futures Trading Commission (CFTC) recently found that 81% of oil trading volume was driven by speculation. Then we witnessed the failure of SemGroup and the indictment of Optiver Holding for manipulating energy prices -- those funds who were too slow to reverse their positions and got creamed.
Now, Ospraie Fund's failure will hurt a big Wall Street name which owns 20% of it -- Lehman Brothers Holdings (NYSE: LEH), according to BBC News.
More such failures are likely. While there may be safety in numbers on the upside, when trades turn south it's a rat race to flee the ship before it sinks.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
9-03-2008 @ 4:56PM
Jack said...
What comes around goes around. These greedy speculators have screwed the consumers and now they are paying the ultimate price.
If oil speculator company Goldman Sachs goes under, I would say that they deserve it. Ditto Morgan Stanley, et. al.
The CFTC needs to get out of bed with Goldman and grow some teeth (and a set) and go after the rest of these greedy devils.
9-04-2008 @ 12:09PM
Hedge Fund Search Digest said...
Such collapsed funds are now often providing new hires for large, surviving funds, as the hedge fund industry as a whole consolidates.
http://bloomberg.com/apps/news?pid=20601087&sid=aVyY_TAIQZEs&refer=home
("Citadel, SAC Capital Get Pick of Casualties as Carnage Worsens")