Red Kite metals fund up 50% after well-timed copper switch

The Red Kite metals fund posted returns of just over 50% in 2013 after a well-timed switch from a short to a long position in the copper market around the time that prices posted their lows for the year, well-placed sources told Metal Bulletin.

The physical metals fund was up more 50% in 2013, while two other Red Kite funds have also returned double-digit percentage gains, a source familiar with the matter told Metal Bulletin.

Red Kite bucked the recent trend of weak returns seen from commodity funds largely because of well-timed trades in the copper market which returned profits on a drop in copper prices the first half of the year and a rally in the second half, other observers of the company said.

After starting the year with a bearish view on the market, Red Kite began repositioning the fund over May and June after witnessing a turnaround in physical copper sales in China, taking a large long position in outright prices, spreads and physical stocks.

The switch largely coincided with a slump in the copper market that took prices on the London Metal Exchange to year-to-date lows of $6,670 per tonne in late June, down 20% from its high of $8,305 per tonne in February, sources said.

The long position delivered returns as copper prices rebounded to finish the year up nearly $700 from its 2013 low, but Red Kite also made strong returns on physical inventory and spreads as copper premiums jumped in Asia and the LME forward curve moved into backwardation, market sources told Metal Bulletin.

"The Red Kite switch was definitely up there as one of the big trades of the year; the volumes were huge," a source active in the copper market told Metal Bulletin.

At the time, sell-side analysts in particular were turning strongly bearish on the copper market, reacting in part to lagged evidence of the slowdown in demand that prompted Red Kite to run short positions around the start of the year, sources said.

"Good data is very hard to come by in the copper market, and at the time I think a lot of people were trading looking in the rear-view mirror," one observer of the company told Metal Bulletin.

In slashing their price forecasts, analysts were also reacting to a huge increase in mine output during the first of the year.

But Red Kite also took a contrarian view of the supply swell, predicting that unless prices and treatment and refining charges rose significantly, smelters would not be sufficiently incentivised to turn the additional tonnes of copper contained in concentrates into metal, sources said.

That smelter bottleneck, combined with the increase in end-use demand in China, helped launch cif Shanghai copper premiums to more than $200 towards the end of the year.

In addition to the 50% returns on the metals fund, Red Kite’s Compass and Prospect funds have also posted percentage returns in the "upper teens", the source familiar with the matter said, confirming results first reported by Bloomberg.

The performance of the funds is likely to boost results for its 2013/14 fiscal year, which ends on March 31.

Net profits reported by RK Capital Management declined significantly in its last fiscal year ended March 31 2013, mainly as a result of increased expenses charged by RKX Services Ltd, a corporate member of RK Capital, after a 50% increase in investment management staff.

Notable among the hires was market analyst Michael Jansen, who resigned as md of metals research at JP Morgan in June 2012.

RKX expenses recharged to RK Capital totalled £4.77 million in 2012/13, up from £1.2 million the previous year, as the number of RKX investment management staff increased from 14 to 21, Companies House filings for both companies show. 

RK Capital’s net profits for the year were £856,918, down from £11.33 million in the previous year, as its total administrative expenses rose to £6.99 million.

RK Capital’s gross profits during the period were £7.85 million, down by a third from the previous year, Companies House filings show.

Mark Burton
mburton@metalbulletin.com
Twitter: @mburtonmb

Mark Burton

mburton@metalbulletin.com

Published

Mark Burton

January 14, 2014

15:15 GMT

London