04/21/2010

Shorting Sugar, Touradji Makes 1Q Killing

Commodities-fund operator Touradji Capital last month finished unwinding a home-run trade in the sugar market that netted a profit of around $46 million, more than tripling an investment that started as a loser.

The New York firm, led by Paul Touradji, began betting against sugar prices around October, when futures were trading in the range of 20-22 cents per pound on the ICE Futures U.S. in New York. Over the next few months, the outlook for Touradji's bearish position looked increasingly grim, as the price of sugar futures began an historic climb to a 29-year high of 30.4 cents per pound on Feb. 1. The run-up was largely attributable to adverse weather that stifled production in Brazil and India, the world's largest sugar producers.

Watching its position turn worthless, Touradji remained committed to its view that prices would fall over the longer term. In fact, the vehicle, Touradji Global Resources Fund, continued to increase its position by accumulating cheap, "out-of-the-money" put options on futures contracts, eventually winding up with 30,000 puts. The contracts gave the holder an option to sell sugar futures, for delivery in May, for 18 cents and 20 cents a pound by mid-April. Each futures contract represents 112,000 pounds of raw sugar.

It quickly became obvious to traders in the New York sugar pit that a big investor was snapping up a large volume of puts, but most were under the impression that the buyer was using the options to hedge a long position.

Soon after the Feb. 1 peak, Touradji began selling its puts, whose prices had soared as sugar prices dramatically reversed course and fell roughly 45% to around 17 cents by the end of March. The decline in the commodity price, which took place even faster than the rise, was driven mainly by forecasts for bigger crops in Brazil and India. Touradji had cashed out of its position by the end of March, with little time to spare before the April 15 expiration of the options. The result: one of the sugar market's largest gains from a single position in recent memory.

Said a floor broker: Touradji "was looking at a trade that he was probably thinking would be a loser, and within a month or so the trade became a home run."

Meanwhile, others fell victim to the violent swing in sugar prices. Armajaro Capital of London and Aisling Analytics of Singapore took beatings in the first few months of this year, mainly due to incorrect bets on sugar prices.

Touradji, known as a "Tiger cub" because he previously worked at Julian Robertson's Tiger Management, started his firm in 2005. It has around $2.5 billion under management.

Touradji is now rumored to be amassing a long position in nickel, helping to drive up the price of the base metal during the first three months of this year, according to Reuters.

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