The quickest way to manage $1 Billion: start with $5 B

The news today is of a supposed shining star of commodity trading closing up shop, with Clive Capital (managing over $5B AUM at one point) having sent a letter to their clients explaining its “long volatility approach,” didn’t allow for many opportunities in this current market environment, and therefore would be shutting down.  That’s a far cry from when the firm was dubbed an overnight sensation – per the FT:

“Soon after its launch in 2008 by Chris Levett, a former star trader at Moore Capital, Clive carved a name for itself as one of the savviest commodity investors in the world. It was dubbed an “overnight sensation” by one trade magazine and rapidly pulled in money from clients eager to profit from a then-booming commodity cycle.”

Now, we don’t usually hear of Clive Capital in the managed futures arena… with their branding being more of a ‘commodity hedge fund’. They aren’t in the BarclayHedge database, for example, or part of many of the managed futures indices – despite being long/short commodity traders. But it’s not every day you shut down with $1 Billion under management – a number many small CTAs would give their left arm for. I suppose it’s different when you are hitting the $1 Billion mark on the way down from $5 Billion, and looking at a 3rd straight year of losses.

What’s likely going on here is one of the less appealing sides (yet they have so many) of the hedge fund business, where it is more profitable for a manager to shut down an underperforming fund and switch to a new one or go to work elsewhere with the possibility of earning a percent of future profits, versus earning back lost capital for investors and earning your fees once new high water marks are hit. Indeed, Clive themselves seem to say the timing of when a good environment for them will return was a contributing factor:

“It is unclear as to when a heightened opportunity environment will return in commodities, although ultimately, it most certainly will,” Clive added.”

Clive is the firm which had one of the most public trading losses we can recall back in 2011, when they lost more than $400M in a week, good for a loss of about -9%, when Crude Oil prices tumbled unexpectedly (in a 5 standard deviation daily move). Perhaps that was a sign of things to come? Of more difficult times ahead?

“Clive’s management said it was at a loss to explain what had caused crude oil markets to be “annihilated”.

Clive’s letter said: “The move in Brent represented about a 5 standard deviation move, while WTI was a 4 standard deviation move”. A five standard deviation daily move is an exceptionally rare event.”

In the end – don’t feel too sorry for Clive head man Levett though – he reportedly took home $136.8 Million in 2010 …. and he’s now got more time to spend with his lovely wife…before starting his next fund.

Chris LevettPhoto Courtesy: Bloomberg

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