Hedge fund commodity bets soar after Russia invades Ukraine

Soroban Capital Partners LP, a $10 billion stock-picking hedge fund in New York, is one of the biggest gainers, earning at least several hundred million dollars on the trade since February, a person says close to the file. Other winners include New York macro fund Castle Hook Partners and value investor Pilgrim Global. The bet was that a year-long drop in spending on sourcing new commodities and efforts to limit carbon emissions would drive up material prices and producer shares, according to people familiar with the businesses.

Commodity-focused funds that have made similar bets are posting outsized returns – around 30% in the first two months of the year in some cases – after years of poor performance.

After a decade of distress, energy has emerged as one of Wall Street’s big winners, boosted over the past two weeks by Russia’s invasion of Ukraine. The S&P 500 energy sector recently outpaced the broad index by the largest margin ever in data dating back three decades, according to Dow Jones Market Data. The energy sector is up 37% year-to-date, while the broad index is down 12%. U.S. crude recently rose above $130 a barrel, its highest level since 2008, after briefly dipping below zero two years ago after the coronavirus pandemic began.

“We are in the early innings of a generational investment opportunity,” Soroban founder Eric Mandelblatt wrote in an annual letter to investors dated Jan. 20.

Many of the assets that Soroban or other hedge funds have recently picked up – such as shares in oil producers, fertilizer makers or commodity futures – have soared as war disrupts markets already strained.

Russia accounts for more than 10% of the world’s supply of oil, natural gas and wheat. It is also a major source of potash which fertilizes crops around the world. Ukraine is also a major exporter of agricultural products.

Russia is a major fertilizer producer; a phosphate operation in Cherepovets, Russia.


Photo:

Andrei Rudakov/Bloomberg News

Traders say replacing materials that have been pulled from world markets by sanctions, export bans and war itself will be difficult. Reserves are low after years of declining capital spending, and it can take years to license and develop new large-scale projects.

Commodity prices went haywire amid the disruption. Industrial metal nickel prices doubled in hours on Tuesday to all-time highs, boosted by a short squeeze in which a Chinese producer was forced to unwind a lower price bet. Aluminum has also hit record highs recently, as has wheat.

Few have made as large a bet on commodities as Mr. Mandelblatt, who began his career on Wall Street in the 1990s as an energy analyst for Goldman Sachs Group Inc. Soroban profited from energy bets and materials for several years after its founding in 2010, but as oversupply drove commodity prices down, the hedge fund took a year-long hiatus from the sector.

That changed last year, when soaring natural gas prices in Europe caught Mr Mandelblatt’s attention. Limited renewable energy capacity has forced many companies to turn to coal, underscoring the world’s dependence on fossil fuels despite its green energy ambitions. Commodity price volatility and pressure on companies to limit emissions have made pursuing new commodity projects less likely, Mandelblatt told investors.

At the same time, Soroban believed the move towards clean energy would increase demand for metals such as copper, nickel and aluminum that are building blocks for electric cars and solar projects.

Soroban has gone from having no exposure to commodities in its flagship hedge fund in late September to more than $3 billion in trade at the start of this year, people familiar with the firm said. Companies backed by Soroban in the fourth quarter, when it made the bulk of its commodity-related investments, include oil producers Canadian Natural Resources ltd.

and Suncor Energy Inc.,

Vale mining company HER,

and fertilizer manufacturers Mosaic Co.

and Nutrien ltd.

according to a regulatory file.

Commodity prices are hot right now. But the prices investors pay on the open market for commodities like coffee, copper or corn have little to do with the price customers pay at the store. The WSJ’s Dion Rabouin explains. Illustration: Adele Morgan

Gains from trading Soroban’s $10 billion main fund offset losses from its fast-growing stock bets for the year through February, people familiar with the company said. A Soroban segregated fund launched on February 1 dedicated to betting posted a double-digit percentage return for the month.

Castle Hook, which manages $2 billion, and Pilgrim’s Value of $250 million, began putting their versions of the bet in 2020. They both rose by double-digit percentages this year through February, said people familiar with business.

The rally in commodities has also been a boon for the few investment firms that still focus solely on the sector. Houston-based Bison Interests, a roughly $50 million hedge fund that invests in junior oil and gas producers, has gained about 30% in the first two months of the year, according to a person familiar with the company. A roughly $130 million mutual fund managed by Goehring & Rozencwajg Associates LLC that holds commodity producers has risen about as much this year.

“I don’t think the severity of the supply-demand mismatch and the likely longevity of that mismatch is well understood,” Bison chief investment officer Josh Young said in an interview.

Write to Juliet Chung at [email protected] and Amrith Ramkumar at [email protected]

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