Hedge funds started a year ago by a leading investment strategist, Barton M. Biggs, have been stung by losses this year, partly because of a bearish bet on the price of oil at a time when the commodity's prices are setting records.
Biggs, for nearly three decades a strategist at Morgan Stanley, set up his investment firm, Traxis Partners, in June 2003 with two other longtime Morgan employees. He now manages around US$2 billion in assets. Biggs, 71, was part of an exodus of scores of prominent Wall Street executives over the last few years who started hedge funds -- portfolios managed on behalf of wealthy investors and institutions like pension funds.
Biggs's funds were down more than 7 percent this year through July, net of fees, according to a letter to Traxis investors. A majority of the losses came in July, as the price of oil soared.
On Thursday, crude oil for September delivery settled at a record US$48.70 a barrel on the New York Mercantile Exchange. Futures prices have climbed more than US$10 a barrel since the end of June.
In his letter to investors, Biggs said he thought the price of oil should be closer to US$30 to US$34 a barrel. So convinced is Biggs of his investment thesis that he increased the size of his bet in July, even as prices were rising.
"When the price of an investment goes against us, unless the fundamentals have changed, our inclination is to buy more," he said in the letter.
Biggs said he considered oil overpriced because supplies were surging even as he anticipated a slowdown in the global economy. He also cited a "terrorism premium of at least US$12 a barrel in the current price."
Biggs did not return calls placed to his office on Thursday. His funds rose 16 percent last year, according to the letter.
His bearish bet on oil is the latest in a string of contrarian bets Biggs has made. He had a negative view on stock prices, for example, during much of the bull market of the 1990s, although he turned bullish in late 2002 just before the market hit its lows.
"In our previous lives, we have been through investment cold spells similar to this one," Biggs said. "Often the pain becomes most intense just before the turn."
Still, not all of Biggs's prior contrary bets fared well. Before he joined Morgan Stanley in 1973, Biggs helped run a hedge fund called Fairfield Partners, set up during the last big boom for hedge funds. Fairfield lost money in the early 1970s by shorting some highflying growth stocks. The stocks eventually dropped, but the bet was too early.
Biggs's decision to reenter the hedge fund business last year was certainly not against the grain. The number of hedge fund managers has increased tenfold since 1990, to some 3,000 firms.
"The hedge fund mania that now grips the US and Europe is rapidly assuming all the classic characteristics of a bubble," Biggs wrote to Morgan Stanley clients in 2001.
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