Another Hedge Fund Bites The Dust: Trafigura Shuts Down Its Flagship Metals Fund

Another Hedge Fund Bites The Dust: Trafigura Shuts Down Its Flagship Metals Fund

Tyler Durden’s pictureSubmitted by Tyler Durden on 11/30/2015

Two months ago, with everyone focusing on Glencore, we urged readers to “Forget Glencore: This Is The Real “Systemic Risk” Among The Commodity Traders” in which we profiled the “other” major independent commodity trader, Trafigura, specifically looking at the quite daunting $21.9 billion in disclosed debt which suggests a debt/EBITDA of a staggering 10x.

Since then the newsflow out of Trafigura has been troubling (perhaps justifying why its bonds continue to yield somewhere north of 8%) and culminating last week with the announcement that Duncan Letchford, chief executive officer of Trafigura’s hedge fund Galena Asset Management, is leaving the company. As Bloomberg, who first reported the high profile departure last week, wrote, “Letchford, who has served as a member of Trafigura’s management board since August 2012, is leaving to pursue other interests” adding that Letchford took over the role of Galena CEO in March 2014 from Jeremy Weir, who became CEO of Trafigura after co-founder Claude Dauphin was diagnosed with cancer.”

Letchford was the third senior executive to leave Trafigura in six months. His exit follows the resignation of Chief Financial Officer Pierre Lorinet, who left in September, and Simon Collins, the former head of metals who departed in May.

And while the storm clouds continue to build above Trafigura, we now know the fate of Galena and why its CEO Letchford departed the company in a hurry last week: according to a follow up from Bloomberg, Trafigura has decided to close the flagship Galena Metals Fund, the latest hedge fund victim of the rout in raw materials markets from oil to copper.

“In view of the difficult conditions prevailing on commodities markets, Galena Asset Management has decided to wind down the Galena Metals Fund,” Trafigura said in a statement on Monday. “Investors have been informed and trading positions are being unwound in an orderly manner.”

This is how Trafigura described the various strategies employed by the now-defunct hedge fund:



Most assets are managed in Galena’s liquid trading strategies. These take long-short, directional and strategic positions in metals and minerals. There are two main funds.


The Galena Malachite Fund is a single-client fund managed against an agreed benchmark. The Fund has significantly outperformed its benchmark since inception. The Galena Metals Fund is the company’s flagship fund. It has generated outstanding performance over more than a decade, with low volatility and a compound annual return of 9.21 percent to 30 September, 2014.




The Galena Commodity Trade Finance Fund generates stable and uncorrelated returns with extremely low volatilities. It has been returning close to 5 percent over London Interbank Offered Rate (LIBOR) to investors annually. The Fund participates in the low-risk segment of global pre-export commodity trade finance transactions alongside banks. It is typically held by institutional investors as part of a larger portfolio of assets to diversify their fixed-income risk.




The Private Equity Resources Fund closed in September, 2014 with over USD400 million of total committed and invested assets. The Fund invests in both the equity and debt of small to medium sized metals and mining companies, particularly those that are in a development or expansion phase. The Fund invests globally in coal mining, and base, ferrous and precious metal assets. Its major independent investors sit on a Limited Partners Advisory Committee (LPAC). The LPAC is currently composed of two family offices, a US university endowment and a European listed insurance company.

This is what Trafigura will look like now that Galena is out:



Copper strikes again.

Bloomberg adds that Galena is one of the best-known hedge funds investing in metals, particularly copper, alongside rivals Red Kite Group and Citrine Asset Management LLC. Copper prices fell this month to a six-year low below $4,500 per metric ton.  The LMEX Index, which tracks the price of aluminum, copper, nickel, zinc, lead and tin, has lost half its value since setting a record in 2007.

What is again surprising is that the loss suffered by Galena, whose AUM was as high as $2.2 billion as of September 2014, is hardly earth-shattering: “the $300 million Galena Metal Fund dropped 4.5 percent this year, heading for its first annual loss since 2012.”

Perhaps it was the failure to continue its winning ways that drove the surge in redemptions: the fund, which was more than twice its current size five years ago, had made money in nine out of 10 years since it was started in 2005.

Trafigura, which has major operations in Geneva and Singapore, said it will retain other funds, including its private equity fund focused on debt and equity of mining companies. The trading house will update the market on its hedge funds when it releases its results later this month.

Galena is not the first casualty in the commodity hedge fund space, where traders are heading for their worst year since the 2008-09 global financial crisis. One prominent name to recently shutter was the $450 million Armajaro Commodities Fund.

Others include Cargill which said in September it would spin off its $7 billion hedge fund unit Black River Asset Management. The separation came two months after Black River shut down four funds investing in equities, emerging markets, commodities and a regional fund focused on Europe, Africa and the Middle East.

Krom River Trading AG, a commodities hedge fund based in Switzerland, told investors earlier this year it would re-launch after its assets under management fell to $64 million in June, down from about $800 million in 2012.

The one common theme among these commodity casualties is that they were all just levered plays on China’s commodity demand remaining stable. Since this thesis has failed misrably in the past year, expect many more closures, some of which will ultimately impact the holding companies, even if they, like in the case of Galena and Trafigura, transacted at what at first sight appears to be arms’ length.

Finally, as Bloomberg writes, the amount of money under management by hedge funds specializing in commodities stands at $24 billion, 15 percent below the peak three years ago, data from Hedge Fund Research Ltd. show. This AUM has not kept up with the drop in underlying metals suggesting that if the commodity downturn persists, many more closures are only a matter of time.

As for Trafigura, keep a close eye on its various other subsidiaries and investments among which Puma Energy, DT Group, Impala Terminals, and the Trafigura Mining Group: any continuing weakness for Trafigura’s overlevered business model certainly lead to more shutterings among these subs before it finally impacts the commodity trader itself.

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