The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (26 page)

He chattered on about market structure and his own history, including how he’d made his way to Delta. He grew more reserved when it came to describing his exit, saying he could not discuss it.
“I got really angry about the book,” he said simply. It was positioned for a rise in crude, he added, and “they wanted to flip it.”

Instead of addressing his situation, Ruggles offered a tour of his new home, a spotless, four-story building on a quiet suburban side street. The family was still settling in, and the house was minimally furnished, but the warm wood floors and fresh white walls were inviting.

Ruggles’s home office was in a cozy attic space, under a window overlooking the street. Walking over to a pair of screens, he pressed the mouse button to move the cursor over some commodities charts highlighting the energy market’s recent activities. He had been trading quite a bit lately, he said. The adjoining screen was open to his personal account, under the heading “Ivonne Ruggles.”

Two months after that interview, I heard word that Ruggles had been forced out of Delta, not because of a hedging dispute but because of some federal investigation involving his wife. In late March, I called Ruggles and confronted him about the rumors.

Ruggles acknowledged having personally been under investigation by the CFTC at least since 2011, saying that the agency had “been watching me closely for probably a year and a half.” But the probe had played “zero” part in his departure from the airline, he said. He talked about the issues that had arisen between Delta and Platts, and the blowback he had received at Delta from brokers like Goldman, which were allegedly concerned about its trading activities. He denied that the Justice Department, which was rumored to be reviewing his activities and Ivonne’s role in them, was involved.

Ruggles was weirdly insouciant. When it came to regulatory
probes, “I don’t care, it’s par for the course,” he said. I had surmised that Ruggles had hoped I simply wouldn’t find out about his trouble with the CFTC and that it wouldn’t bear a mention in my book, but it seemed that perhaps he simply didn’t care either way. His involvement in the world oil business as a London trader, a McKinsey consultant who had worked for foreign clients, and a senior trader at Delta would no doubt make him a person of interest to the U.S. government, he said: “That’s going to be a part of my life for the rest of my life in this business.”

He clammed up after that.

G
oldman’s respected commodities analyst, an Oregon-born Anglophile named Jeff Currie, was meeting clients at London’s Mandarin Oriental hotel when it hit him that the boom he had been profiting from for years might finally be over.

It was October 2012 and London Metal Exchange week. Hosted by the historic bourse, hundreds of metals traders were in London for a series of seminars on the market they covered: a spectrum of base, or nonprecious, metals that ranged from aluminum to zinc. Currie’s team at Goldman covered all the major markets, and with a large collection of current and potential clients all in the same place at once, he had arranged a breakfast information session to showcase his research.

On the morning of the gathering, Currie ran through his usual outlook, stopping to field the occasional question as he went. But something in the room, he realized, was off.

It wasn’t the attendees. Some of the commodity world’s biggest personalities were in the room, traders whose profit-and-loss statements had been the subject of glowing press just a few years ago. It was their performance and their mind-set that had changed.
Instead of entertaining wild stories of how they had beaten the market, Currie was hearing about the difficulty the managers were having in hitting up investors for new money. Suddenly he was feeling more like a shrink than a market advisor.

Given what had actually happened to commodity contract markets, it was understandable. The Goldman Sachs Commodity Index had traded sideways for two years in a row, ending each year neither up nor down and removing the big commodity-price moves that had helped generate returns in years past. Tired of trading the markets or weighed down by losses, names like Centaurus and BlueGold, the two best-performing funds in commodity-trading history, had summarily folded, along with countless lesser-known rivals. Survivors like
Clive Capital and John Paulson’s dedicated gold fund were struggling with sharp reversals. Glancing around the room, Currie noted that the collective assets under management were the lowest they had been in the decade or so that commodity-focused hedge funds had even existed. No wonder, he thought, when the average commodity fund that year was
on track to lose almost 3 percent.

In fairness, Currie thought it wasn’t all the managers’ fault. “It’s not so much that the commodities story itself is over,” he said after the London meeting, “as it is that the other asset classes,” or groups of investment instruments, like stocks or bonds, “have a better outlook.”

Currie had prepared a chart showing that the era of cash, oil, and gold as favored trades had effectively ended. Despite the commodity supercycle, a theory still being thrown around at the time that argued for a protracted period of high commodity prices, he felt that the potential for returns was now far better in stocks. During the 2000s, as commodities were raging toward
their all-time high, stocks were up only slightly. But the Fed’s easy-money policies, the centerpiece of which was a recurring $85 billion monthly asset-purchasing program intended to stimulate the economy, had helped the stock market recover from the financial crisis. Investments in simple stock indexes like the Dow Jones Industrial Average and the Standard & Poor’s 500 stock index were now creating the sort of gains in stock-trading hedge funds that the commodity players had once generated: 15, 18, even 20-plus percent, simply by taking old-fashioned positions in publicly traded companies.

As of this writing in early 2014, more than a year after he said it, Currie’s proclamation about stocks sounds obvious. Day after day in 2012 and 2013, the stock markets hit all-time highs, zooming past historically significant levels for the first time ever. Bonds, which along with commodities had been a darling of post-recession investing, were suddenly unwanted, as investors shied from treasury notes and safe corporate bonds with terrible returns. Investing in treasuries, the respected stock investor Leon Cooperman said repeatedly, was
like walking in front of a steamroller to pick up a dime. Even the market for junk, or likely-to-default, bonds and risky European credit, usually a lucrative sandbox for sophisticated investors, was too crowded to enter at reasonable prices. Desperate for better yields on their money, too many traders had already piled into them.

In order to invest in stocks, mutual funds, or pension funds, endowments and hedge funds had to locate some cash, and, in many cases, that involved dumping out of commodities. Around the time of Jeff Currie’s breakfast meeting, two years since the last time the average commodity hedge fund had made a profit, money managers were doing just that.

The California Public Employees’ Retirement System, also known as Calpers, which had made the commodities world seem palatable to small investors with its initial investment of $450 million in 2007, hastened the exodus. Ironically, Calpers had never actually made money on commodities, even though it bought them during years of solid returns—and had in fact lost, on average,
8 percent of it per year. Other major pensions, including the Illinois Teachers’ Retirement System and the California State Teachers’ Retirement System, uncertain of the value of commodities investments, opted out too.

Critics of commodities as mainstream investments, such as Better Markets economist David Frenk, believed the whole pitch had been a mirage. Some blamed the investment banks for flogging commodities indexes that, given the cost of rolling contracts forward every month or two, were simply too expensive to hold when the price of raw materials wasn’t rising. Those embedded costs, the critics said, had effectively ruined the GSCI, the Dow Jones–UBS, and other commodity trackers in a world where the degree of contango, the scenario in which commodity contracts tied to future prices were pricier than current commodities, wasn’t big enough to bury them. It was unfortunate that Calpers and others had failed, they said, but, in a way, it was justified, because the pension funds had become the dumb money and it was time to get smarter about regular people’s cash.

“I’m not a fan of the indexes,” said Jeff Scott, chief investment officer at the $74 billion financial firm Wurts & Associates, which had used commodities as a portfolio hedge over the years, as the rotation got under way.

“In this space, it has to be a thoughtful, probably active-manager approach,” he added. “Do we need to have lean hogs in
the portfolio? That may not be the best thing. And a lot of stuff is packaged together that we don’t need.”

Scott, who was implementing other tools in his investment mix in order to curb the risk of inflation—one of those problems for which you want positions that aren’t correlated to the stock market, like commodities—had a point. But the trouble with commodities ranged far beyond simple performance numbers. Because of actual misdeeds and regulatory clampdowns to ward off expected future ones, the raw-material trading industry itself was getting a bad name. The failures of the Peregrine Financial Group,
the Iowa futures brokerage that filed for bankruptcy in 2012 after its founder made off with more than $215 million in customer funds, and
of MF Global, which had been ordered by the courts to make harmed customers whole, had eroded trust in U.S. contract trading overall. Dodd-Frank had made house trading at banks nearly impossible and made “swap,” or private contract, trading more cumbersome, and stood to make futures trading less profitable. Even with Gensler on his way out, the CFTC was winning greater respect in commodity circles, and other regulators, like the Federal Energy Regulatory Commission, or FERC, and the Justice Department, were becoming active in policing commodity trading too.

In 2013 JPMorgan was charged by FERC with manipulating regional power markets in the U.S. by using elaborate pricing schemes.
The bank was fined $410 million on its civil violations alone, and the U.S. Attorney in Manhattan continued to investigate
possible criminal actions in the matter. In the throes of the FERC settlement talks,
JPMorgan announced plans to sell off its physical commodities business altogether. Morgan Stanley too, beset by trader departures and dwindling revenue, was in
on-and-off talks with suitors to buy its commodities division. Just before Christmas 2013, Morgan Stanley announced plans to sell its oil and gas assets to the Russian producer Rosneft, where Morgan’s former chief executive, John Mack, was a director. The CFTC inquiry into Ruggles’s personal account continued, with no clear resolution pending. (Ruggles himself recently told me he had given up trading some time in 2013; as of this writing, he is working as a consultant to the energy business at the private-equity firm the Carlyle Group.) Meanwhile, the exposure of Goldman’s aluminum-warehousing practices spurred multiple government probes as well as a private lawsuit accusing it of anticompetitive behavior. Goldman was fighting those charges, and claimed it had no imminent plans to sell Metro International Trade Services, which under the relevant regulations was safely in place until 2020. But changes to the London Metal Exchange warehousing rules in the wake of the aluminum flap made Metro far less profitable.

There was more. In Europe, Tony “Chocfinger” Ward’s cocoa corner had embarrassed the industry, and Glencore’s IPO had inadvertently invited a period of painful new scrutiny. Just a few years after the U.N. oil-for-food scandal and Trafi’s toxic-waste incident in the Ivory Coast, the physical commodity traders were again seen as mercenaries who left damage in their wake.

They could shrug off the tabloid rich lists and accounts of their children partying with celebrities (the subject of an anonymous gossip item in the
New York Post
involving Ivan Glasenberg’s daughter), but the more substantive allegations resonated. During its negotiations with Xstrata alone, Glencore was the subject of two astonishing documentaries: “
Stealing Africa,” an account of its
Zambian copper-mining business that highlighted how the country actually lost money by providing electricity to miners like Glencore while they in turn siphoned out $3 billion in revenue; and a
BBC documentary that revealed child laborers working on Glencore mining property in the Democratic Republic of Congo. Glencore fought the allegations, arguing that it never employed minors and that the children depicted in the documentary were associated with local squatters, but the revelations kept coming.

The secret club, for the most part, held firm, fueled by its own finances, its prominence in the industry, and, to some extent, its raw talent. Bank ownership would come and go, regulatory priorities would change, and investors might occasionally walk away. But even forty years after Marc Rich had monopolized the crude- oil trading market, there still weren’t that many players with whom to share the spoils. A global presence in numerous commodity-trading markets was a rare thing indeed, a recipe for making money if you knew what you were doing. And a true knack for wagering on the price vicissitudes of crude, copper, or cotton remained a profitable skill in almost any environment—especially when only a handful of individuals in the world could really do it well and on a large scale.

Andurand is a case in point. Early in 2013, he opened his new firm, Andurand Capital, and settled the remaining legal issues with Dennis Crema amicably. He even sent me an e-mail saying what a nice guy his former partner was and that he hoped their relationship would come off well in this book. The first six or so months at the new fund went terrifically for Andurand. Settled in Knightsbridge and employing some of the very same staff—including Neel
Patel and Paul Feldman—that BlueGold once had, Andurand Capital generated more than 50 percent returns as of midyear, betting rightly on the inefficiencies in the market for Brent crude contracts compared to their West Texas Intermediate siblings.

The young Frenchman was back in the press, chatting about kickboxing and crude-oil spreads, being mentioned as the husband of a stunning former model, and generally succeeding at a time when others failed. By the fall, however, that bet on the spread, or gap, between Brent and West Texas crude had shaved off some of those gains. Still, Andurand was ahead. By the end of 2013, he was up 24 percent, and was managing more than $200 million. His onetime rival, Jean Bourlot, was less fortunate; at the same time Andurand Capital was preparing investor presentations to highlight its maiden year, Bourlot’s London-based hedge fund, Higgs Capital, was shutting down. So, for that matter, was
Arbalet Capital, the fund Jennifer Fan had opened in 2012. She soon joined the hedge fund Millennium Management as a commodity trader there. She was thirty.

Like Andurand, former Xstrata head Mick Davis was a success story. Late in 2013, just months after the rancorous Glencore deal had been finalized, he announced an initial funding round of $1 billion for his new mining venture, X2 Resources. Backed by two respected investors, Asia’s Noble Group and the private-equity firm TPG, Davis was predicting mining gains at a time when the company he’d just left had written down $7.7 billion, largely on losses related to Xstrata assets. His impressive reputation, it appeared, had preceded him—and investors were willing to provide him with an influx of cash to use. Not surprisingly, Brett Olsher helped advise on the
deal.