Saijel Kishan

Oct. 29 (Bloomberg) — For Dwight Anderson, it was the kind of death-defying ride he hadn’t experienced since the last time he jumped out of a helicopter on skis in Alaska. In the first five months of 2006, Anderson’s commodities hedge fund firm, New York-based Ospraie Management LLC, suffered a series of setbacks that led to the closing of one of its funds and a 19 percent loss in Anderson’s flagship $3.6 billion Ospraie Fund. “Every single major position we had — equities, agriculture, energy, precious metals and base metals — lost money,” says Anderson, 40, referring to losses in April and May 2006. “It was highly stressful. You just feel a fatigue in your whole body.”

Ospraie, the world’s biggest commodities hedge fund firm, with $7 billion under management, recovered from that crisis — only to be hit by another much less severe downdraft in July and August, when the U.S. credit markets seized up in response to rising defaults in subprime mortgages. “August was a very difficult month for commodity hedge funds,” says David Friche, portfolio manager at Geneva-based Banque SYZ & Co., which invests more than $8.5 billion in hedge funds. “The fundamentals of demand and supply weren’t in place, and people were selling commodities just to get cash.”

The Ospraie Fund lost 3 percentage points in the quarter ended on Sept. 30, according to investors. The fund was still up 7.5 percent for the year as of mid-October. Its commodities hedge fund peers gained an average of 6.5 percent through September, according to Chicago-based Cole Partners Asset Management LLC, which invests in such funds.

Anderson declined to comment on Ospraie’s third-quarter performance.

King of Commodities

Anderson has survived the tumult of the past two years in part because of his reputation as the king of commodity hedge funds. Losing a fifth of its value can put a hedge fund out of business, says Dirk Sohnholz, managing partner at Feri Institutional Advisors GmbH, a Bad Homburg, Germany-based investment adviser.

“The skills of the manager are paramount,” Sohnholz says. Lehman Brothers Holdings Inc., which bought a 20 percent stake in Ospraie in 2005 for an undisclosed amount, stood by Anderson. And investors, led by Zurich-based Credit Suisse Group, poured $3 billion in new money into Ospraie from June 2006 to October 2007.

“We’re a huge fan,” says Brian Finn, 47, who runs Credit Suisse’s New York-based alternative investments group, which manages $134 billion in private equity and hedge fund assets. “Anderson’s the best-in-class player in dealing in the world of basic industries and commodities.”

Tudor Connection

Anderson has been running Ospraie since 1999, first as a stand-alone fund within Tudor Investment Corp., Paul Tudor Jones’s hedge fund firm, and since 2004 as an independent company. Until 2006, Anderson hadn’t had a losing year. His average annual return from 1999 through 2005 was 18 percent, according to investors.

Anderson’s newest venture is the Special Opportunities Fund. Since February 2006, he’s raised $1.2 billion for the fund, which has taken direct stakes of more than $50 million in biofuel producers, mining companies, timber firms and barge companies.

“Owning physical assets provides unique and valuable insight into commodity price movements,” says Ospraie’s John Duryea, 42, who co-manages the fund, with Anderson. Credit Suisse has invested $500 million in the fund, which returned 9 percent this year through September.

One of Anderson’s friends and admirers is Marc Rich, the former fugitive oil trader who now invests in hedge funds from his base in Zug, Switzerland. Rich, 72, has known Anderson since the Ospraie head was a trader at Julian Robertson’s Tiger Management LLC from 1994 to ’99.

One Admirer: Marc Rich

“I view Dwight as a very experienced and hard-working commodity specialist,” Rich said in an e-mail relayed by Hans Brun, chief executive officer of Marc Rich & Co. Holding GmbH. “I appreciate his market views very much.” Rich says he’s not an Ospraie client.

The Ospraie Fund makes long and short investments — that is, it bets values will rise or fall — on the prices of commodities such as oil, copper and corn and on the shares of companies in basic industries such as energy, mining and agriculture. What hurt Ospraie and other commodity hedge funds in mid-2007 were the wide, sometimes unpredictable, swings in prices in all markets.

“Commodities are more volatile compared with stocks and bonds,” Banque SYZ’s Friche says. “So the stakes are higher, which means that while there are great profits to be made, there are great losses too. It’s a dangerous game.”

The UBS Bloomberg Constant Maturity Commodity Index of 28 futures rose 12 percent through July 20 and then gave up more than half of its gains from July 20 to Aug. 16 as hedge funds globally sold energy, metal and agricultural contracts to help stem losses from their investments in equities and bonds.

Volatility

The price of oil plunged 9.5 percent to $68.63 a barrel from its Aug. 1 record price of $78.77 and then rose sharply to an all-time high of $92 on Oct. 26. Nickel, which rose to a record price of $51,800 a metric ton on May 9, had lost more than a third of its value by Oct. 26.

And there may be more volatility to come, Anderson says. The single biggest driver of commodity prices has been China, whose fast expansion has made it the world’s biggest consumer of copper, nickel and lead. “They are growing at such a rate that if that was allowed to continue, it would create one of the bigger bubbles of our lifetime,” Anderson says.

At least four commodity hedge fund firms suffered fatal crashes from September 2006 through the end of October 2007. On Sept. 5, New York- and London-based Global Advisors LP, co- founded by Daniel Masters, former head of energy at JPMorgan Chase & Co., said it was shutting two of its three funds after losses of up to 13 percent this year through August.

Fatal Crashes

Ospraie’s Wingspan Fund, which is a fund of hedge funds, had a small stake in Global Advisors, investors say. Wingspan, though, was up 8.5 percent through mid-October.

Red Kite Metals, a hedge fund run out of London and New York by RK Capital Management LLP, lost 20 percent in August, according to three investors who declined to be identified because the information is private. That put the fund down 29 percent for the year. It’s run by Michael Farmer, who has been trading metals for more than 40 years. The fund returned 188 percent in 2006.

The most spectacular collapse came in September 2006, when energy trader Brian Hunter lost $6.6 billion for Greenwich, Connecticut-based Amaranth Advisors LLC by making wrong-way bets on the price of U.S. natural gas, forcing Amaranth into bankruptcy.

Long on Agriculture

At Ospraie, Anderson recovered from his 2006 losses mainly by going long on agricultural commodities. In July 2006, Anderson publicly predicted corn, soybeans and cotton would move up. “Agricultural profitability is going to be exceptional,” he said at a conference in London. “Food and fuel demand will be competing for agriculture, which will provide the best risk- adjusted returns.”

Anderson says his calculation that grain futures were a smart investment was confirmed in a January 2007 trip to Brazil, where he toured a 13,000-hectare (32,000-acre) farm near the town of Cristalina, 85 miles (137 kilometers) south of the capital of Brasilia. The owners of the farm told Anderson over dinner that they were unable to meet rising demand for their corn, cotton and soybean crops. Even so, they were planning on shifting some land to sugar cane production to supply a local ethanol facility.

“It was one of those moments — call it a moment of clarity — where things just clicked together and I could see the reality of how things in the industry have gone and how they are going to go,” Anderson says. “You just saw the supply crunch that was coming.”

Wheat Sets Records

That month, Ospraie returned 6.6 percent, according to investors, breaking even after its losses in 2006. During the 12 months ended in July, soybeans increased 43 percent; corn, 39 percent; and cotton, 18 percent. Wheat, 2007’s second-best- performing commodity as of Oct. 26, rose to a record $9.6175 a bushel on Sept. 28.

Anderson and the 39 analysts and traders who work for him normally invest over a two-year period. They spend as much as half of their time traveling to farms, mines and refineries researching investment ideas. The founder, who, like his mentor Robertson, is his own chief portfolio manager, journeyed to at least 15 countries in the first six months of 2007.

He surveyed palm oil plantations in Malaysia, metal producers in France and oil service companies in Texas. Other destinations included Australia, China, Peru, Qatar, Saudi Arabia and South Korea.

Tracking Vietnamese Coffee

If they’re not traveling, Ospraie’s analysts and traders are studying their computer screens, assessing oil inventories at terminals in Cushing, Oklahoma; monitoring stockpiles of copper stored in Singapore; tracking coffee harvests in Vietnam; or measuring demand among car manufacturers for palladium, a metal used in building catalytic converters and other electronic devices.

Ospraie’s offices occupy the entire 27th floor of a Park Avenue office building. An abstract painting depicting the Alaska oil pipeline adorns one of the office walls. Anderson’s staff has increased to 70 from 25 since he split off from Greenwich-based Tudor at the end of 2003. Ospraie’s traders sit together in a blue-tinted glass room, designed to minimize distractions. Lunch is provided so that the workers are never far from their computer screens.

Ospraie buys futures contracts for metal, energy and agricultural commodities. It also invests in shares of commodity-related companies. Anderson’s stock picks in 2007 included Occidental Petroleum Corp., the fourth-largest U.S. oil company. The fund owned 732,000 shares of Los Angeles-based Occidental as of March 31, according to a filing with the U.S. Securities and Exchange Commission.

Gold Bug

The company’s shares jumped 17 percent in the following quarter as oil prices rose 7 percent. By the end of June, Ospraie had sold its shares.

On the commodities side, Ospraie was a buyer of gold in 2007. “We look at gold as a barometer of wealth in the world,” Jason Mraz, 40, Ospraie’s head trader, told conference attendees in London last June. “The underpinning of demand is very strong.” At the same time, he went on to say, supply of gold and other precious metals has been restrained by a shortage of mining labor in South Africa and other countries. The price of gold has climbed 21 percent since Mraz’s prediction as of Oct. 26, when it rose to a 27-year high of $786 an ounce.

About every two weeks, Anderson’s traders and other employees get together for lunch to talk about investment ideas from different parts of the business. “We have people who understand the grains market, the energy market, the metals market, the shipping markets, better than anyone out there,” Ospraie President Eric Vincent, 42, says. “But it becomes very powerful when you can connect those reservoirs of information.”

`I Live With Stress’

Anderson says the task of managing $7 billion of other people’s money is a persistent source of anxiety. “I live constantly with stress,” he says. “I’m always worried that we’re wrong.” Until the 6-foot-3 inch (1.9-meter) money manager got married two years ago, he relieved the pressure with motorcycle riding, scuba diving, bungee jumping and heli-skiing — the last at resorts in Cordova and Girdwood, Alaska. He says he’s cut back on adventure sports since getting married and having a child.

A Princeton University history graduate whose parents named him after their favorite U.S. president, Dwight Eisenhower, Anderson jettisoned a plan to go to law school and in 1989 joined a computer and software consulting firm called Pansophic Systems Inc. After 18 months, he took a job with one of the companies he had been consulting for, Amsterdam Printing & Litho Co., a paper company based in upstate New York. What he learned about management in those two jobs guides his investment decisions today, he says.

Tiger Scholarship

Having decided on a business career, in 1992 Anderson enrolled in the Master of Business Administration program at the University of North Carolina at Chapel Hill — and was the recipient of a Tiger Scholarship from UNC graduate Robertson. His summer job in 1993 was on the coffee, cocoa and sugar desk at Goldman Sachs Group Inc. in New York.

By the time graduation rolled around, he had breakfasted with Robertson and talked with several other Tiger executives. He rejected a job offer trading equities on the night desk at Tiger and instead hired on with J.P. Morgan & Co., trading derivatives and commodities.

When Robertson learned he had lost Anderson to another firm, he took off in pursuit. Just 10 weeks after joining J.P. Morgan, Anderson resigned to accept Robertson’s offer to serve as deputy to Bob Bishop, who ran Tiger’s basic industries and commodities group. Three months later, Bishop left the firm, and Robertson put Anderson, then 27, in charge.

`Ignorance of Youth’

“I needed the ignorance of youth to have the confidence to do that,” Anderson says.

Anderson says it was his interest in global affairs that led him to the world of commodities. “It’s something that’s tangible, that you can get your arms around, and it has to do with world news,” he says.

Anderson says he learned most of what he knows about smart investing from Robertson. He likes to tell the story of Tiger’s mid-1990s bet that the price of palladium was set to rise sharply. Robertson sent Anderson to Siberia, where most of the metal is mined, and South Africa to check on supply. All of the research showed there was a severe shortage — of as much as 2 million ounces (57,000 kilograms) — yet, for three years, the price failed to rise.

Anderson never wavered from his conviction. Finally, palladium’s price moved because of export disruptions in Russia, soaring to more than $1,000 an ounce in 2001 from $120 in 1997.

Ospraie is Hatched

At Tiger, Robertson, 75 and now retired, made virtually all of the final investment decisions. Anderson wanted to handle his own money, and in 1999, he joined Tudor, where he set up an independent commodities hedge fund inside the firm. Ospraie — an eclectic spelling of osprey, an oceangoing bird of prey — was born. The new fund returned 17 percent after fees in its first year of trading, according to investors.

In 2004, Ospraie, with $1.2 billion in assets at the time, became independent. Tudor remains an investor. Fifteen Tudor employees stayed with Anderson, including Richard Puma, who had been head of Tudor’s U.S. operations for nine years. Puma, 39, is now Ospraie’s chief financial officer.

Anderson says his biggest worry was that he would immediately have a bad year. Instead, Ospraie returned 25 percent in 2004 and 13 percent in 2005, according to investors. Those returns helped trigger a flood of new investment in Ospraie’s four funds — the flagship Ospraie Fund, the Point Fund, the Real Return Fund and the Wingspan Fund. By the end of 2005, Anderson was managing $3.5 billion.

The Worst Year

The bad year turned out to be 2006. Worst hit was the $250 million Point Fund, which plunged 29 percent in the first five months of the year after a series of wrong-way bets on metal futures, forcing Ospraie to close it down.

None of Anderson’s funds carries much leverage, and that helped the flagship Ospraie Fund survive despite its 19 percent loss in the same period.

One of Anderson’s wrong-way bets was on the price of copper. Supply shortages in the first five months of 2006 had driven prices higher. He bet that increased production would drive prices down in the second half of 2006. He acted on this by buying futures contracts going out to 2010 that shorted the copper price.

Institutional investors, however, had poured so much money into copper and other commodity markets that as spot prices surged in the first five months of 2006, it increased the value of two- and three-year copper futures contracts, which meant Anderson was losing money.

Loyal Investors

Ospraie’s corporate owners suffered along with Anderson. Still, they stuck by him. “Every investment organization has its good and bad periods, and we’re prepared for volatility in commodities,” says George Walker, 38, Lehman Brothers’ global head of investment management, which oversees $275 billion. “We had zero doubt about the capabilities of Dwight and his team and had every confidence that they would recover.”

Anderson makes no apologies for his shaky performance. “The fact that I had a horrible quarter is a statistical probability, and we had always told people there is that possibility,” he says. “We do everything that we can to manage the risk, and I think we’re better at it today than we were a year ago.”

Bishop, Anderson’s first boss at Tiger and now head of his own hedge fund, sees the Ospraie chief’s survival as proof of his good training by Robertson. “It’s a quality of a Tiger cub,” he says, a term applied to alumni of Robertson’s investing shop. “The fact that Dwight managed to recover is testament to his strength of character. It’s all about persevering.” And it’s only slightly more nerve-racking than jumping out of helicopters on skis.

To contact the reporter on this story: Saijel Kishan in London at skishan@bloomberg.net

Last Updated: October 29, 2007 00:20 EDT

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