Schroder Commodity Fund, KKR Equity Hedge Fund Shut Operations

June 23, 2014

Two major hedge funds are calling it quits on the back of redemption pressure from investors following successive years of below average returns. One is them is the Opus commodity hedge fund of the London-based Schroders which had at its peak $2.3 billion under management but has since seen its assets dwindle to only a few hundred million dollars in recent years. The other is the equity hedge fund of private equity firm KKR which is shutting down the $510 million fund as it struggles to get traction in its business. The shutdowns come at a time when the hedge fund industry is witnessing noticeable growth in assets under management on higher capital allocation by institutional investors.

Environment Challenging for Commodity Hedge Funds

The Opus commodity fund of Schroders invested in some of the biggest commodity hedge fund firms and had its money in 17 commodities hedge funds last year. Among the funds it invested include Astenbeck Capital, run by star oil trader Andrew Hall who as the commodities unit head of Citigroup earned $100 million in 2008 as a performance bonus at a time when Citigroup was rescued by a government bailout. Opus also had its money in well known metals trading firm Red Kite as well as in CC+, a cocoa trading fund run by Anthony Ward.

Commodity traders have struggled to make money in recent years. Low volatility in commodity prices has led to a very challenging environment for many commodity hedge funds whose profits depend in part on wide swings in prices. One example of the challenging conditions is the volatility level in US crude oil prices, which hit a 17 year low last year as higher supplies helped guard against potential supply disruptions.

With its decision to close operations, Opus has joined a few other high profile commodity hedge funds such as Higgs Capital Management LLP, Arbalet Capital LLC and Clive Capital LLC that exited the commodity business recently.

KKR Retains Hedge Fund Interests

KKR’s decision to close its equity hedge fund was a surprise as there was no indication that such a move was in the cards. The fund was set up only three years ago and was headed by Bob Howard, who previously headed a proprietary trading unit at Goldman Sachs. KKR cited “the failure to attain scale at the business” as the primary reason for closing the unit. The closure will see about a dozen or so traders leave the firm, Howard however will remain with the firm. Despite shutting this fund, KKR retains its  24.9 percent stake in Nephila, a hedge fund focused on catastrophe and weather risk-related investments. It also owns the fund of hedge funds Prisma, which has $10 billion under management.

Relevance to Job Market

The closing of two prominent hedge funds at a time of relative calm in the financial markets brings to light the challenges some funds face even at a time of increasing capital allocation to the industry. The Opus fund closure reinforces the continued difficult environment for commodity hedge funds while the KKR equity fund shutdown appears to be a result of fund-specific issues. These two examples show that one cannot remain complacent once they have gotten into a prominent hedge fund. Learning new skills on the job and continuously striving for improvement prepare a worker to better cope with job loss due to unexpected fund closures.

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