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Hedge Fund Merchant Advances 16% as Oil Drops With Iron Ore

Photographer: Qilai Shen/Bloomberg

The Merchant Commodity Fund gained 16 percent in the first eight months as bets on declines in crude oil, iron ore and sugar helped to boost returns, according to Chief Investment Officer Doug King.

The fund, run by King andMichael Coleman, returned almost 8 percent last month, King said in a phone interview from London on Sept. 5. Merchant’s assets under management, a gauge of performance and inflows, increased 39 percent to $185 million in August from the previous month, King said. The fund returned 15.9 percent in 2013, according to King.

Brent dropped for a second month in August, while iron ore fell to the lowest since 2009 as rising supplies boosted a glut of the steel-making raw material. Prices may extend declines as slowdowns inChina and Europe weaken demand, while the improvement of the U.S. economy strengthens the dollar, raising costs for holders of other currencies, according to King.

“The global GDP picture is not very good and that assisted us in positioning for some commodities, where demand is pretty awkward,” said King, using initials for gross domestic product. Brent may decline to $95 a barrel in the next couple of months, while iron ore may drop to $75 a dry metric ton before possible first-quarter restocking, he said.

Brent futures dropped 9.8 percent this year to $99.94 at 2:15 p.m. in Singapore today. The benchmark slipped to the lowest close in 16 months yesterday as higher output in the U.S., Iraq and Libya offset concern that fighting in the Middle East would disrupt supplies.

‘Key Proxy’

Iron ore with 62 percent content at the Chinese port of Qingdao lost 38 percent this year to $83.98 a dry ton yesterday, according to Metal Bulletin Ltd. Raw sugar retreated 9 percent to 14.94 cents a pound on ICE U.S. Futures as oversupply persisted for a fourth year.

The increase in assets in August was the first significant inflow in two years and came mostly from pension funds, King said. Merchant benefited from insights into demand through its physical-commodity trading house, RCMA Group Pte Ltd., he said.

RCMA, based in Singapore, handles cargoes of rubber, sugar, cotton and coffee from 11 offices in Asia, Europe and the U.S. The firm added a Guatemalan coffee mill this year as headcount expanded to 180 from 65 in 2010, King said.

“Our rubber delivery is declining worldwide,” said King. “Rubber goes to tires, and tires go to truck and heavy industries. That’s a key proxy of demand.” Rubber futures slumped 28 percent this year inTokyo.

Dollar Climb

A property slowdown in China, the biggest user of energy, metals and grains, boosted concern the government may miss its 7.5 percent GDP growth target this year. In Europe, the 18-nation euro area is struggling with a stalling economy and escalating sanctions against Russia that threaten trade flows.

The Bloomberg Dollar Index gained 2.7 percent this year on prospects for an increase in borrowing costs as the recovery of the world’s largest economy gains traction. Federal Reserve policy makerCharles Plosser said on Sept. 6 that he favored raising rates sooner rather than later.

“We don’t see many bright sparks in the industrial sector unless there’s some major restocking,” King said. “We don’t see that yet.”