Sept 19, 2012
For three excruciating weeks in May, Renee Haugerud, the founder of New York hedge fund Galtere Ltd., agonized that her wager on corn was a massive mistake.
She had started buying in March, when futures contracts averaged about $5.59 a bushel, expecting steady to rising demand from ethanol refiners and feedlots to boost prices. Instead, on May 10, the U.S. Department of Agriculture reported record planting and forecast a bumper crop. Prices began a 12 percent slide for the month. Other hedge funds bailed.
Haugerud, 57, the daughter of a part-time farmer, fought the temptation to join the crowd, Bloomberg Markets magazine reports in its October issue. Instead, she and her team got to work. They rechecked past corn yields and plowed through ethanol production and export numbers to reconfirm their calculation of strong demand for a so-so crop.
The U.S. Environmental Protection Agency bolstered their case in April when it raised the limit for ethanol in gasoline to 15 percent from 10 percent for cars made after 2001, later aiding the buying Haugerud had forecast. As for supply, Haugerud thought the USDA was overoptimistic in its harvest prediction. If farmers were planting in amounts not seen since 1937, her farm upbringing and commodities experience told her they were tapping marginal land. This all didn’t add up to a corn bonanza.
“Our research said that, at best, we were going to get an average yield,” she says. “The market was pricing in perfection.”
For a gut check, at month’s end, Haugerud flew to the firm’s research farm in southern Minnesota, near where she had grown up. As she scooped a handful of dirt, her confidence in her corn bet swelled. The dry soil crumbled. And the stalks were less than knee-high, with some well below average at 6 inches (15 centimeters).
Her analyst, swinging through Iowa, Illinois and Indiana, reported that farmers were complaining about heat — a sign of impending drought.
“I was shocked how short the crop was,” Haugerud recalls in her corner office in the Scribner Building on Fifth Avenue, where, when not touring fields and mines, she’s chief investment officer overseeing five analysts and traders. “I’m a tire kicker, not a screen watcher.”
‘Knock on Wood’
Haugerud is using her crop smarts to trounce rivals. Thirty-two states, from South Carolina to Nevada, have baked in the worst drought since 1956 during a year that toppled the 117- year-old U.S. heat record. Corn contracts hit $8.1775 a bushel on July 30, more than $2.50 above March levels.
Haugerud, who sold her futures position that day, says grains and soybeans will keep up the momentum. Farmers are expected to harvest 10.7 billion bushels of corn, the smallest crop in six years, the USDA said in September. Soybeans have gained 37 percent this year through mid-September, the most among the 24 commodities tracked by the Standard & Poor’s GSCI Spot Index.
“The second half of 2012 is going to be fantastic,” Haugerud says, adding that Galtere still holds options to gain from corn prices. “I better knock on wood,” she adds, jumping up to tap her desk. “I’ve had a breakout year every five to 10 years, and my last one was in 2002. I’d better knock on wood again.”
Haugerud has good reasons not to tempt fate. After a disastrous 2011 that saw her Galtere International Master Fund fall 10.4 percent, her corn bet is yielding profits. Galtere gained 5.3 percent in July, more than double the 2 percent for the Newedge Commodity Trading Index, which monitors hedge funds that trade in agricultural and other commodities. The fund was up 0.5 percent in August.
The fund’s returns have averaged 11 percent a year since 1999, topping 4.9 percent for the HFRX Global Hedge Fund Index compiled by Hedge Fund Research Inc. Through the end of August, Galtere is up 9.3 percent in 2012.
Although Galtere invests in equity, bond and currency markets, commodities underpin Haugerud’s decisions.
“We have a commodity lens through which we view every trade,” she says. Last year, she shorted Chile’s peso when she thought copper was heading lower. Copper futures fell 20 percent in the second half.
Haugerud is unique in the world of commodities-focused hedge funds — a woman from a Midwestern farm whose $600 million hedge fund is beating some of Wall Street’s top players. Female managers oversee just 3 percent of the $2 trillion in hedge-fund assets, according to HFR.
Commodities have proved a tricky business in the past 18 months. Concerns over China’s growth, Europe’s economy and Iran’s nuclear ambitions have made predicting price swings tougher.
Clive Capital LLP, a $3.3 billion London hedge fund that invests in oil, currencies and farm commodities, lost 3 percent in July. Fortress Investment Group LLC said in May it would close its $500 million commodities fund after shedding almost 13 percent in four months amid bets on oil and metals. BlueGold Capital Management LLP, which soared 200 percent in 2008 on rising oil prices, closed in April after tumbling 34 percent last year.
“Fundamental analysis doesn’t always work because of the political environment,” says Marcus Storr, head of hedge funds at Bad Homburg, Germany-based Feri Trust GmbH, which manages about $20 billion.
Arpad Busson, chairman of EIM SA, a fund-of-funds firm in Nyon, Switzerland, says Haugerud’s 30 years of trading commodities and currencies help her overcome setbacks.
“She has strong stamina and does deep homework,” says Busson, who met Haugerud in the mid-1990s and invests with her. “She has the kind of experience in commodities that very few people have.”
Haugerud says commodities, especially agricultural products, will outperform stocks and bonds during the next two decades.
In today’s economic climate, which she calls “inverse stagflation,” interest rates are low and money is plentiful, yet growth is anemic. Commodity prices had tripled as of the end of July since 1982, while stocks had soared 11-fold. Now, she predicts commodities and real assets like farmland will appreciate while stocks and bonds stagnate. Corporations won’t be able to pass rising costs to consumers, which will hurt share prices.
So far, she has been right. For the five years ended in August, the commodities benchmark S&P GSCI Spot Index climbed 36 percent compared with a 4.6 percent drop for the S&P 500.
“This is a regime change from the dominance of stocks and bonds,” she says.
Farm prices will jump further as genetic engineering, irrigation and fertilizers fail to replenish overused land.
“Productivity in yield enhancement is coming to an end,” she says.
In the U.S., fewer young people are taking up the plow just as Brazil, Turkey and Indonesia consume more food.
“That will put pressure on agricultural prices,” she says.
Haugerud grew up amid the farms and forests of Fillmore County, Minnesota, rising before dawn to feed the cattle. Her father, Neil, was sheriff, and their home doubled as the jail. Young Renee helped serve breakfast to the prisoners in the rear of the house.
When she was 5, her dad took her in a single-engine plane to check cornfields, explaining how investors could sell corn on a futures exchange without actually owning it.
“I was mesmerized,” she recalls.
Haugerud headed to the University of Montana, Missoula, for a forestry degree. After graduation in 1980, she became a trader at Minnesota commodities giant Cargill Inc. Genesis Capital Fund LP, a hedge fund based in Fairfield, Iowa, headhunted her in 1993 to run proprietary trading. She moved to Hong Kong two years later with the U.K.’s NatWest Markets Ltd.
Longing for her own company, she put up $5 million in 1997 to found Galtere, a name she invented to convey “pragmatic simplicity.”
Galtere climbed 61 percent in 2002, Haugerud’s breakout year. Gold futures rose 25 percent, and she shorted the S&P 500, which fell 24 percent. The company, however, had only $12 million in assets and couldn’t attract investors.
“There is a subliminal feeling, which I don’t agree with, that women won’t lose you money but won’t be able to make you big money,” she says.
Haugerud approached Cargill’s hedge fund, Black River Asset Management LLC, run by former boss Gary Jarrett. Cargill invested $60 million, and Black River took a 49 percent stake in 2003.
“The minute Cargill said they’d invested in me, ka-ching, ka-ching, and the money started pouring in,” she says. When Black River offered to buy the rest, Haugerud and investors instead bought back Black River’s stake.
“She’s very entrepreneurial and didn’t want to work in a corporate environment,” Jarrett says.
Galtere’s assets soared to $2.4 billion before Haugerud suffered through three down years. The flagship fund fell 1.7 percent in 2008 and 0.1 percent in 2009. In 2011, her wager on resource-rich nations backfired. In one instance, Haugerud bought the Brazilian real and Mexican peso and sold the dollar, calculating that those nations would grow faster than the U.S. Instead, Greek debt buffeted Europe, the dollar rose and commodities fell.
“We got the big picture wrong,” Haugerud says.
Her strategy to manage risk forced her to close trades after 2 percent losses.
“Even though I traded for 30 years, it depressed me,” she says.
Haugerud’s second fund, Galtere Ultra, convinced her to keep going. Ultra makes the same bets as the flagship but tolerates more risks. As of the end of July, the fund was up 43 percent since its inception in October 2008.
“There’s a science of trading and an art of trading,” she says. “The science of trading ponders the past; the art of trading focuses on the future. In a good hedge fund, you need both.”
That’s the message Haugerud wants to instill at the University of Tennessee at Chattanooga’s College of Business. She and her husband, John Murphy, a retired Axa SA executive and university alumnus, have a home in the city and donated $2 million to the school. Of that sum, $1.5 million went to start the Galtere Institute, which aims to imbue finance with a female perspective via courses such as the neuroscience of trading.
“One goal of the program is to give women access to trading, which can make them a lot of money,” Haugerud says. “I believe in women getting their fair share.”
As Haugerud interviewed candidates to head the center in July, she kept an eye on grain estimates and weather patterns. In the fall, she’ll visit Minnesota to check on crops again, before heading to silver mines in Mexico and coffee fields in Brazil — trying to spot any signs that could derail her prediction for a profitable second half.