Soroban Capital Partners LP, a $10 billion New York-based hedge fund, is one of the biggest winners, having made at least several hundred million dollars trading since February, a person familiar with the matter said. Other winners include New York macro fund Castle Hook Partners and value investor Pilgrim Global. The bet, according to people familiar with the firms, was that years of cuts in new product supply costs and efforts to curb carbon emissions would drive up material prices and producer stocks.
Commodity-focused funds that have made similar bets are posting huge gains—around 30% in the first two months of the year in some cases—after years of poor performance.
After a decade of calamity, energy has emerged as one of the biggest winners on Wall Street, having received a boost in the last two weeks due to Russia’s invasion of Ukraine. The energy sector in the S&P 500 recently outperformed the broad index thanks to its largest lead in three decades of data, according to Dow Jones Market Data. The energy sector is up 37% this year, while the broad index is down 12%. U.S. oil recently topped $130 a barrel, its highest level since 2008, after briefly falling below zero two years ago after the coronavirus pandemic began.
“We are at the start of a generational investment opportunity,” Soroban founder Eric Mandelblatt wrote in his January 20th annual letter to investors.
Many of Soroban’s or other hedge funds’ recent acquisitions, such as shares in oil and fertilizer producers or commodity futures contracts, have skyrocketed as the war erodes already tough markets.
Russia accounts for more than 10% of the world’s oil, natural gas and wheat reserves. It is also the main source of potassium, which is used to fertilize crops around the world. Ukraine is also a key exporter of agricultural crops.
Russia is a major fertilizer producer; phosphate plant in Cherepovets, Russia.
Photo: Andrey Rudakov/Bloomberg News
Traders say replacing materials taken from global markets as a result of sanctions, export bans and the war itself will be difficult. Reserves are low after years of declining capital expenditures and it may take years to authorize and develop new large scale projects.
Commodity prices have fallen sharply due to the crisis. Prices for industrial nickel metal doubled just hours on Tuesday to an all-time high, helped by a short squeeze that forced the Chinese producer to cancel its bet on falling prices. Aluminum also broke records recently, as did wheat.
Few have bet as big on commodities as Mr. Mandelblatt, who began his career on Wall Street in the 1990s as an energy analyst at Goldman Sachs Group Inc. Soroban profited from betting on energy and materials for several years after its founding in 2010, but as oversupply drove down commodity prices, the hedge fund took a years-long hiatus from the sector.
The situation changed last year when the sharp rise in natural gas prices in Europe caught Mr. Mandelblatt’s attention. Limited renewable energy capacity has forced many companies to return to coal, highlighting the world’s dependence on fossil fuels despite its clean energy ambitions. Volatile commodity prices plus pressure on companies to curb emissions reduce the likelihood of new commodity projects, Mr. Mandelblatt told investors.
At the same time, Soroban believed that the move to clean energy would dramatically increase demand for metals like copper, nickel and aluminum, which are the building blocks for electric vehicles and solar panels.
Soroban went from having no access to commodities in its flagship hedge fund at the end of September to more than $3 billion in trading earlier this year, according to people familiar with the firm. Companies backed by Soroban in the fourth quarter, when it made the bulk of its commodity-related investments, include oil producers Canadian Natural Resources Ltd. and Suncor Energy Inc., mining company Vale SA, and fertilizer maker Mosaic Co. and Nutrien Ltd. according to regulatory documentation.
Commodity prices are hot right now. But the prices investors pay on the open market for commodities like coffee, copper, or corn may have little to do with the prices buyers pay in the store. Explains Dion Rabouin of the WSJ. Illustration: Adele Morgan
Soroban’s $10 billion core fund trading gains offset losses from its betting on fast-growing stocks in the year to February, people familiar with the firm said. A separate betting fund launched by Soroban on Feb. 1 posted double-digit interest returns for the month.
Castle Hook, which manages $2 billion, and Pilgrim Value, $250 million, started making their own versions of the bet in 2020. Both are up double-digit percentages this year through February, people familiar with the firms say.
The recovery in commodities has also been a boon for several investment firms that remain solely focused on the sector. Bison Interests, a Houston-based hedge fund that invests in small oil and gas producers, is up about 30% in the first two months of the year, according to a person familiar with the firm. A mutual fund of about $130 million run by Goehring & Rozencwajg Associates LLC, which owns commodity producers, is up about the same this year.
“I don’t think the severity of the supply/demand mismatch and the likely duration of that mismatch is well understood,” Bison chief investment officer Josh Young said in an interview.
Write to Juliet Chung at [email protected] and Amrit Ramkumar at [email protected]
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