Explination for Decline..fund blowupCopper and zinc prices tumbled this last week in volatile trading after a report that a $1billion UK base metals hedge fund suffered losses of about 20 per cent in January. The report sparked fears another Amaranth-like debacle may be in the making.
Zinc fell as much as 12 per cent on the London Metal Exchange in a day — the sharpest one-day plunge in 18 years. Copper, meanwhile, dropped as much as 6.3 per cent.
Part of the downward push came in response to a report in The Wall Street Journal that said Red Kite Metals LLC, a metals hedge fund launched in October, 2004, by Red Kite Management Ltd. of London, has sustained losses from falling metals prices.
The losses prompted the fund to ask investors in a January 31 letter to agree to extend the amount of notice they must give before withdrawing money from the fund to 45 days from 15. That is a defensive tactic hedge funds can employ if they are expecting a mass exodus by investors, because it gives them more time to sell positions and reimburse investors. The Journal report also said that as of January 24, Red Kite was down about 20 per cent for the year, citing an "unofficial estimate" the fund gave to one investor.
Copper prices fell about 20 per cent last month. David Lilley, one of Red Kite's three partners, reportedly said in Shanghai last month that, with copper prices down sharply, it was a good time to buy. He also said the metals fund had risen to $1 billion from just $50 million at its launch.