Julian Barrowcliffe's AnglianCommodities Fund exited the natural gas market almost a year before Amaranth Advisors LLC

Julian Barrowcliffe's AnglianCommodities Fund exited the natural gas market almost a yearbefore Amaranth Advisors LLC, another hedge fund, was destroyedby plunging energy prices. Barrowcliffe steered his $497 million fund, operated byVegaPlus Capital Partners Ltd., to metals. That helped produce a22 percent gain in the 12 months through October, according to aletter sent to investors in the New York-based fund. The GoldmanSachs Commodity Index has lost 14 percent over the same period. Like Amaranth, whose demise cost investors $6.5 billionafter a bad bet on differences in natural gas prices, Anglianinvests using a so-called relative value strategy. It attempts toprofit from price discrepancies between commodities, markets,delivery dates and locations. ``We decided natural gas was rather hot to handle,''Barrowcliffe, 44, said in an interview from the London offices ofVegaPlus. ``It seemed to us that there was a huge amount of moneychasing returns in the North American natural gas and power spaceand everyone was tripping over each other.'' Demand for commodities from China, where the economy hasexpanded 10 percent in each of the past five years, has helpedfuel prices for oil and raw materials, giving investors such asBarrowcliffe opportunities to exploit price differences. Metals have been the best commodity performers this year.Nickel and zinc have more than doubled while copper gained 55percent because of production shortages and worker strikes. ``The price moves clearly helped to create the anomaliesthat we were targeting to exploit,'' Barrowcliffe said.

Booms and Busts

No matter how a fund chooses to balance its commodityholdings, using a relative value approach is never risk-free,said Matthew Evans, who advises companies on commodity-riskmanagement at NERA Economic Consulting in New York. ``History tells us that commodity markets, particularlyenergy, are cyclical and prone to booms and busts,'' Evans said.``We have seen that price relationships can blow up, very quicklyand very decisively.'' Barrowcliffe so far is beating his declining benchmark indexwith consistency during some of the toughest times forcommodities investors. Anglian gained 11 percent in the third quarter, during aperiod when the Goldman Sachs Commodity index of 24 commoditieslost investors almost 16 percent. In September, as Amaranthcollapsed, Anglian returned 3.1 percent, according to the fund'sinvestor updates, compared with an 11 percent drop for theGoldman index.

Futures

Hedge funds, which manage $1.3 trillion worldwide, areloosely regulated pools catering to wealthy investors andinstitutions, and invest in a range of assets to profit whethermarkets rise or fall. About 8,000 hedge funds trade globally,based on estimates from Hedge Fund Research Inc. in Chicago. Like most hedge funds, VegaPlus doesn't disclose detailsabout the weight of various holdings in its funds. The Anglianfund, which has increased 8.7 percent this year, instead tellsits investors how each holding has affected returns. Metals holdings have returned 16 percent a year sinceAnglian was founded in 2004. Reducing power and gas holdingshelped the fund mitigate annual losses in those commodities to 5percent, according to reports to investors. Natural gas has beenthe worst-performing commodity this year, plunging 60 percent asinventories rose. Anglian also buys and sells commodity futures ranging fromgold to cattle by using computers to help decide when to investabout 25 percent of the fund. Futures are contracts to buy orsell a commodity on a specific date at a preset price.

Price Discrepancies

The fund invests up to 15 percent of its capital in energy,mining and shipping companies, as well as utilities, according tothe marketing documents. As many as 24 out of 100 commodity hedge funds followrelative value strategies, according to Rian Akey, chiefoperating officer of Chicago-based Cole Partners LLC, whichinvests in commodity funds. The remainder uses a mixture of thatstrategy and so-called directional trading, which involvesbetting on prices rising or falling, he said. Spotting relative value differences is Anglian's advantageover traders of so-called physical commodities, who are better atanticipating price movements, Barrowcliffe said. The strategyinvolves trading on price discrepancies, for example, betweencrude oils in different markets, such as West Texas Intermediate-- the U.S. benchmark -- and Brent in the North Sea.

Looking for Wrinkles

``We look for wrinkles in the markets,'' he said. ``I amtrading against guys with storage terminals, tankers, refineriesand who have government relationships. I had to find somethingthat they didn't do. I try to find ways of trading that didn'tfocus on day-to-day price moves.'' Barrowcliffe himself started out in 1985 as a crude oiltrader at Shell International Trading Co. and later headed globalenergy-trading desks at Merrill Lynch & Co. and Bank of AmericaCorp. Born in Peterborough, U.K., he graduated from LoughboroughUniversity with a bachelor's degree in business administrationand French. The Anglian hedge fund, named to refer to ``old England,''was started by Barrowcliffe with money from Madrid-based VegaAsset Management LLC. Vega Asset Management then spun offVegaPlus, which has $2.5 billion in assets, including the Anglianfund. Vega Asset Management also runs Vega Select Opportunities, ahedge fund whose investors sought to pull about $400 millionafter it fell almost 11 percent in September. Vega AssetManagement's capital now accounts for only 2 percent of theAnglian fund, according to an investor letter.

Shifting Risk

Barrowcliffe operates from what he describes as a ``roomwith a bunch of screens and money,'' in contrast to physicalcommodities traders who get access to information on underlyingassets such as shipments or refineries before other traders. Hisfive-person team includes Uday Narang, previously Europeanpresident of Entergy-Koch LP, and Toly Spheeris, who co-foundedGreenwich Energy Partners in 2002. Shifts in Anglian's portfolio are indicated by the fund'sreports on value at risk, or VAR, which investors use to measurethe potential a company or fund may lose on a given day. Formetals, the fund's VAR rose to 0.35 percent from 0.09 percent,according to a letter sent to investors. The fund's VAR innatural gas was cut to zero from 2.3 percent in the past year. Funds that were less prescient paid the price. The plunge ingas prices also led to the closure of MotherRock LP, a $400million New York-based hedge fund, in August. While Barrowcliffedeclined to comment on failed funds such as MotherRock orAmaranth, he said that having a nose for gas trends has so farvindicated his strategy. ``You had a lot of people throwing lots of money at naturalgas, drawn to the volatility,'' he said. ``There's volatility andchaos and there's a fine line between the two and if the marketis teetering on the brink of chaos you might not want to bearound for it.''