Red Kite Evangelicals Reap 47% on Copper Bet
Red Kite Capital co-founder, Michael Farmer
Daniel Stier/Bloomberg Markets via Bloomberg.
Michael Farmer, Red Kite Capital co-founder and Conservative Evangelical poses for a photograph in his office in London, on December 14, 2011.
Michael Farmer, Red Kite Capital co-founder and Conservative Evangelical poses for a photograph in his office in London, on December 14, 2011. Photographer: Daniel Stier/Bloomberg Markets via Bloomberg.
On a dark, drizzly November morning,
Michael Farmer steps to the pulpit to deliver a stern message to
fellow parishioners at St. Helen’s Bishopsgate, an 800-year-old
church in the shadow of the London Metal Exchange and in the
heart of the City, London’s financial district.
“We live in a cursed world — cursed by God,” Farmer
tells the men and women who fill the church, most of them
workers in the financial industry. “We live in a broken
society; we have broken nations. Look at the euro zone. Life is
a struggle and, in the end, is death.”
Yet those who believe in Jesus Christ need not fear, says
Farmer, a thin man dressed in a charcoal suit and blue tie.
Jesus will provide salvation from the daily hardships of disease
and poverty — and the firings that have left thousands of City
workers unemployed, he preaches.
Farmer, 67, is a Conservative Evangelical who attends
services every Tuesday at St. Helen’s, Bloomberg Markets
magazine reports in its February issue. He also runs London-
based RK Capital Management LLP, a metals-trading hedge-fund
firm with $1.3 billion of assets under management. Its $400
million Red Kite Compass Fund tops Bloomberg Markets’ ranking of
midsize hedge funds for the first 10 months of 2011, with a
return of 47 percent, according to investors.
The $200 million Red Kite Metals Fund rose 34 percent, and
the $100 million Red Kite Prospect Fund surged 50 percent,
clients say.
China Copper Glut
RK Capital specializes in the buying and selling of copper
and prospered by betting that the price of the red metal would
fall in 2011 as the pace of construction in China slowed,
investors say. The assessment proved correct, with copper
retreating 26 percent as of yesterday from a record $10,190 per
metric ton in February 2011.
Farmer says his faith makes him a better money manager by
keeping him humble. The firm’s offices match his humility,
featuring a simple orange sofa in the reception area, gray
carpeting and walls free of art or photos. There is no
receptionist; visitors press a button on the coffee table to let
Farmer and Red Kite’s other co-founder, David Lilley, know they
are there.
“Jesus warns us that there are many dangers to money,”
Farmer says. “I know that in my heart there is greed, there is
wanting just a little bit more. It helps that the Bible tells me
to be wary of this and that one day I will fall off my perch.”
Tory Supporter
Farmer is active both in the church and in politics. He has
given millions of pounds in donations to Britain’s ruling
Conservative Party, saying it has done more than rivals to
promote family values.
Farmer and Lilley, 45, aren’t just owners of futures and
options contracts tied to copper; they also trade the physical
metal, buying the commodity in North and South America, storing
it in warehouses around the world and selling it when the price
is right to companies that turn it into the wire and pipes used
in the construction of homes, office buildings and vehicles.
Farmer previously ran MG Plc, which before its sale in 2000
was the world’s biggest copper trader. Lilley also worked at
London-based MG. Farmer used that experience as a marketing
point when he started RK Capital in 2005.
Physical trading also formed the backbone of what was once
the firm’s biggest hedge fund, Red Kite Metals, which oversaw
more than $1 billion at its peak, according to investors. The
fund — named after an endangered bird of prey native to Europe
and North Africa — proved as volatile as the prices of the
metals it buys.
Volatile Metals Fund
Red Kite Metals surged 188 percent in 2006 on the back of a
global commodities boom, according to investors. It then plunged
50 percent in 2007, rebounded with a 19.8 percent rise in 2008,
then fell 0.9 percent in 2009 and 25 percent more in 2010, when
Red Kite’s bet that copper would decline proved premature.
Clients fled the metals fund, reducing assets to $200
million as of November, investors say.
Farmer says that from 2008 to 2010, the U.S. Federal
Reserve buoyed markets, including those for commodities, by
pouring billions of dollars into the economy. At the same time,
he says, analysts mistook China’s aggressive buying of copper as
a sign that its construction boom was continuing, when in fact
the Chinese were stockpiling the metal.
The sluggish world economy makes Farmer a pessimist.
“We are not very positive about things,” he says. “The
world is in a bad place. We are still fighting to recover from a
very serious recession, and I think it is going to go on for
another four or five years.”
Derivatives Trader
One reason the assets of Compass surged ahead of Red Kite
Metals is that Compass deals only in futures and options, not
the physical metal.
“We avoid physical games because it includes other risks
and is less liquid,” says hedge-fund investor Marcus Storr of
Feri Trust GmbH, whose Bad Homburg, Germany-based firm manages
16 billion euros ($20.4 billion). “We’d rather stick to hedge
funds trading mainly in equities of commodity companies and
financial derivatives.”
Farmer and Lilley say clients often prefer funds that trade
derivatives due to investor suspicion of money managers in the
wake of the Bernard Madoff scandal. The contracts Compass buys
can be more easily placed in individual accounts that clients
control, they say.
The Compass fund grew 10-fold to $400 million in October
from $40 million at the end of 2009.
RK and China
Success in forecasting copper sales and prices depends on
an understanding of the Chinese market, which consumes 39
percent of the world’s copper, according to Morgan Stanley (MS)
estimates. RK Capital is now involved in transactions that
account for as much as 15 percent of China’s supply of copper in
a given month, Farmer says.
“At Red Kite, you are dealing with people who have many
years in metals, with great expertise in China and the physical
world,” says Robin Bhar, a metals analyst at Credit Agricole SA (ACA)
in London. “What you can get from the physical market in terms
of flows and views helps immensely to form a view in trading.
They have very good market intelligence.”
Ren Gang, head of research at Shanghai-based Maike Futures
Co., says Chinese copper demand could be weak in 2012 because
local companies can’t borrow money for real-estate projects.
“Companies are short of money as credits are very tight,”
Ren says. “There’s not much restocking of copper.”
Importing Copper
Ren’s company is a unit of Maike Holding Group Ltd., which
imported 600,000 tons of copper into China in 2010. In 2008,
Maike partnered with RK Capital to set up an investment fund in
Hong Kong.
Not everyone is bearish. Goldman Sachs Group Inc. (GS) analysts
Max Layton and Allison Nathan say market jitters in Europe have
led traders to take their focus off the fact that copper
supplies are under pressure. Strikes by workers in Latin America
have created a copper deficit, which will trigger a “strong
rally” in the second quarter of 2012, the analysts wrote in a
Nov. 20 report.
Copper rose to a one-month high of $7,820 a metric ton in
London trading today after analysts, including Royal Bank of
Scotland Plc’s Nikos Kavalis, predicted China will ease monetary
policy in an effort to spur growth.
Some Red Kite funds have been volatile. Hedge funds with
big performance swings risk pushing away institutional investors
such as pension funds and insurance companies, says Neil Campbell, London-based head of alternative investments at
brokerage Tullett Prebon Plc.
“It’s very hard for an institutional investor to be
convinced that a fund that is up 100 percent in any year is able
to manage the downside risk,” Campbell says. “Very few
investors will have the stomach to deal with that volatility.”
‘Roller Coaster Ride’
Farmer says his firm accommodates investors eager to limit
risk.
“We have had the roller coaster ride,” he says. “We
learned from that and try to reflect our investors’ wishes. If
they want less risk, we can build a managed account that is less
risky.”
Some of the volatility stems from the rapid growth in
metals trading. Copper and other industrial metals bought and
sold on the London Metal Exchange rose to $11.6 trillion of
contracts in 2010 from $2.5 trillion in 1999.
The assets of hedge funds that trade metals rose to $86.8
billion in the third quarter of 2011 from $13.4 billion for the
same period in 1999, according to BarclayHedge Ltd., a
Fairfield, Iowa-based data provider.
Financing Mines
RK Capital earned a net 116.2 million pounds ($179.6
million) from 2006 to 2010, with the profits distributed to its
four partners — Farmer, Lilley, Oskar Lewnowski III and a firm
the three men control called RKX Services Ltd., according to
government filings with the U.K.’s Companies House.
New York-based Lewnowski, 46, a former Credit Suisse AG (CSGN)
investment banker, oversees a $400 million fund started by RK
Capital in 2008 that provides financing for mining projects in
return for the right to purchase metals pulled from the ground.
Called Red Kite Explorer, the fund has business deals with
Calgary-based Rio Alto Mining Ltd., which is excavating gold and
copper in Peru, and Nord Resources Corp., a firm that’s digging
for copper in Arizona, according to press releases and filings
with the U.S. Securities and Exchange Commission.
Farmer’s other life, as a Christian, didn’t start until he
was 35. He says he had a “revelation” after his wife, Jenny,
gave birth to the first of their three children.
‘I’m a Christian’
“It wasn’t so much me making a decision. It was more me
seeing something that had been in front of me all my life, but I
was blind to.”
At his November sermon at St. Helen’s, Farmer related a
story about a job promotion offered to him in the 1980s when he
worked at commodities trading firm Philipp Brothers. He accepted
the position, with a caveat.
“I’m a Christian, and there are more important things to
me than the company and making money,” Farmer says he told his
boss at the time. “There is God. There is my family.”
Farmer says he once asked his church rector if he should
give up finance and go to theological school. The rector told
him the finance industry also benefits from the presence of
Christians.
Lilley, for his part, sees little conflict between work and
the faith he shares with Farmer.
Cross Trust
“God wants you to use your talents in the appropriate
way,” he says. “If by the grace of God we can do something in
business, then great, but try to make sure your faith also
guides how you trade and the use of any proceeds.”
Farmer donated 150,000 pounds to St. Helen’s in 2010 and
helps manage 2.48 million pounds held by a trust affiliated with
the church, according to a government filing. The assets are
invested in stock funds overseen by Zurich-based GAM Holding AG (GAM),
the filing says.
Farmer and Lilley also fund a charity called the Cross
Trust, which is focused on advancing the Christian faith and
providing support for the poor, sick and elderly, according to
filings with the U.K.’s Charity Commission.
The Cross Trust, of which Farmer and Lilley are directors,
had assets of 1.5 million pounds in April 2010 after making
595,152 pounds of contributions in the preceding 12 months. The
biggest donations were made to a Christian college and the
Relationships Foundation, a U.K. group that encourages the
government to promote family-friendly policies.
Since 2008, Farmer has given 205,296 pounds to the
Conservative Christian Fellowship, which urges Christians to
support Britain’s Conservative Party, according to the U.K.
Electoral Commission. Farmer has donated an additional 3.28
million pounds directly to the Conservative Party since 2001.
Unwed Mothers
He says he was first inspired to donate a decade ago, in
reaction to the then-ruling Labour Party government’s policy of
giving public assistance to unwed mothers, which he saw as
encouraging them to have more children out of wedlock.
Farmer and Lilley say they are sympathetic to the
demonstrators who set up encampments in the vicinity of
financial centers around the world to protest disparities in
wealth between the barons of the financial system and ordinary
citizens.
“There is a problem, and I am not sure that problem is
going away,” Lilley says. “Those with resources can either use
them to create jobs and employ people, or they can blow them on
overpriced champagne and conspicuous consumption.”
Occupy London
The October Occupy London protests, centered in a tent
encampment around St. Paul’s Cathedral in the City, forced the
church to temporarily close.
The demonstrators heaped opprobrium on the bankers in the
buildings around them. In his St. Helen’s sermon, Farmer said he
wasn’t there to assign responsibility for the global financial
crisis. He urged his audience to stay true to their Christian
beliefs even in a year when almost 10 percent of London’s
finance employees had lost their jobs.
“They can fire you, and that’s really bad,” Farmer said.
“They probably won’t, because if you are a Christian, you are
probably hardworking and honest. But if they do, you are still
with the Lord.”
To contact the reporters on this story:
Jesse Westbrook in London at
jwestbrook1@bloomberg.net;
Chanyaporn Chanjaroen in Singapore at
cchanjaroen@bloomberg.net
To contact the editor responsible for this story:
Michael Serrill at
mserrill@bloomberg.net.
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