What killed the Ospraie?

There’s not too much detail in the fund’s letter to shareholders, in which we’re told the commodities specialist’s 27 per cent slide in August was down to…

… a substantial sell-off in a number of our energy, mining and resource equity holdings during a six-week period characterized by some of the sharpest declines in these sectors in the past ten to twenty years.

Nate Hagens at the Oil Drum has an interesting take on the closure, comparing it to Amaranth’s blow-up in 2006, when trader Brian Hunter built up positions in natural gas futures that went spectacularly awry:

When Amaranth blew up in September of 2006, the world learned about a swashbuckling trader named Brian Hunter. In the Summer of 2006, Brian was reported to be massively short near dated NG futures, and long spring futures in NG for the following year. (I wrote about this and analyzed the crash in the winter/summer NG strips in “A Tale of Two Markets”). There is some indication that his position was so enormous, that when it went slightly against him, the information leaked out to the street, and then other funds and speculators ran in front of him … From the above chart, AFTER the Amaranth blowup was announced (the black arrow), futures made a slight new low and then continued to rally the rest of the year (even with another mild winter).

It’s unclear exactly what positions, in what commodities, Ospraie was holding (there’s a bit more detail about the fund’s investment strategy in a Bloomberg article from last year), but the tendency for hedgies to pile in after a flameout, squeezing the weak with short positions, is well known. What might we expect from Ospraie’s demise then? 1440 Wall Street says this:

Copper was the Ospraie Fund’s bread and butter; keep your eye on it tomorrow. The move down in copper mid-August was probably the killer blow, and I would hope they have managed to exit the bulk of their metal’s positions before releasing the news. There are likely more trades to unwind however, before they can return the remaining capital to investors.