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Ospraie in a corner

Dwight Anderson built a $9 billion hedge fund empire betting on volatile commodities markets. His world came undone this summer.

By Telis Demos, writer-reporter
November 12, 2008: 9:39 AM ET

Dwight Anderson's world unraveled this summer when bets on oil, copper and natural gas soured.
Paul Tudor Jones backed Anderson's first fund, Ospraie.

(Fortune Magazine) -- Years before Dwight Walter Anderson was running the world's largest commodities hedge fund from an office 27 floors above New York City's Park Avenue, he was on the road for a software consulting firm based in Chicago.

In that job, in the early 1990s, Anderson visited dairy and fruit companies. His clients made golf clubs and valves. He worked on the factory floor of a paper company near Schenectady, N.Y. He saw firsthand how businesses operated. Though he'd grown up in northern Westchester, N.Y., graduated from Princeton, and watched many of his peers head immediately to Wall Street, he relished his time in small cities around small-business men.

He would eventually enroll in business school, intern at Goldman Sachs, and become a hedge fund trader. But the movie he kept in his mind's eye throughout it all was Say Anything. Anderson loved the moment when John Cusack, playing a young suburban slacker, describes his career ambitions: "I don't want to sell anything bought or processed."

So in 1999, when the 32-year-old Anderson got his chance to create his own hedge fund, he did not merely resell or reprocess another manager's investing thesis. He created his fund to profit from the long upward move in the price of real things - commodities.

He already had a reputation. Julian Robertson of Tiger Management had recruited him out of the University of North Carolina's business school and sent him to faraway countries to learn about the copper and palladium markets. In return, Anderson made millions trading those metals. That knack landed him a job with Paul Tudor Jones, who set him up with his own commodity fund, Ospraie (a Latin spelling for the bird of prey).

Anderson's Big Idea was to make commodities markets less nerve-racking for investors through two tactics. The first was to trade not only commodities but also the stocks of companies whose prices would mimic the movements of the commodities markets. (Why buy only soybean futures and live with their inherent volatility when you can also buy shares of the barge company that shipped the beans?)

Second, Anderson instilled in Ospraie his passion for exceptional due diligence. He was the kind of guy who bragged that he had inspected a company's palladium mines "north of the Arctic Circle, not southern Siberia!" before he invested in the metal. He lunched with farmers in Brazil before taking a position in sugar. And when he worked at Goldman Sachs (GS, Fortune 500), he couldn't believe the other traders on the commodities desk didn't know what it meant to "spud" an oil well. (It means to start drilling.)

Lehman Brothers famously invested in Ospraie in 2005, and Credit Suisse (CS) did so in 2006. At its peak earlier this year, Ospraie had $9 billion in total assets under management across several funds, including the main Ospraie fund, a fund-of-funds business, and a private-equity-style Special Opportunities Fund. In June, Ospraie bought ConAgra (CAG, Fortune 500)'s trading division.

This summer, however, Anderson's world came undone when nearly all of the main fund's positions - longs and shorts, metals and grains - started to turn against it. On Sept. 2, Ospraie announced that it was closing its main fund, which began the year with $3.3 billion in assets but was down 38.6% by the end of August. Anderson, at the ripe old age of 41, seemed poised to join the ranks of humbled hedge fund managers.

Certainly Anderson is one of many hedge fund managers victimized by the market's terrible year. The average hedge fund has fallen 19% in 2008, and $31 billion in assets were yanked from funds last quarter alone, according to Hedge Fund Research.

But the fall of Ospraie is particularly telling. It is a vivid reminder that the best business minds of a generation were drawn to hedge funds, whether managing a portfolio through good times and bad - the definition, after all, of a hedge fund - was their special talent or not.

In a bull market Ospraie's focus on diligence was richly rewarded. But in an irrational bear market, Ospraie's buy-and-hold philosophy made it especially vulnerable. Anderson, who declined to comment for this article, acknowledged the worry to an interviewer in 2007: "I'm still on my learning curve as a portfolio manager when it comes to how to manage the volatility in the price path along the way. You've got a Point A and a Point C ... The problem is managing the path to get there."

"Dwight didn't wake up less intelligent," says Mark Yusko, a friend, fellow Julian Robertson protg, and Ospraie investor. "He didn't do anything wrong, other than, like the rest of us, none of us saw the potential speed of the deleveraging." Or to put it another way, it is one thing to be a master of the universe in a bull market, but in a bear market every move is brutally magnified.

In hedge funds the road to ruin is often paved with traders who have the right investment thesis but time the markets incorrectly. Dwight Anderson was no exception. Last year he could see clearly where the commodities markets were heading. In May, speaking to hedge fund investors on the campus of the University of North Carolina at Chapel Hill, he said that the energy markets were entering a correction phase.

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