By GREGORY ZUCKERMAN
Wall Street's $100 million man has stumbled, a potential warning sign for traders poised to bolt banks for hedge funds.
Andrew Hall, the legendary energy trader who left Citigroup Inc. last year after his lofty compensation ignited controversy about pay practices at banks receiving government support, has hit a rough patch running his own hedge fund.
His commodities fund posted a decline of more than 10% last month, its weakest month in the last two years, to put it down nearly 10% this year through May, which is behind similar hedge funds. Mr. Hall was bullish as shares of commodity producers and other energy investments declined.
"Unfortunately, we did not dodge the onslaught," Mr. Hall, 59 years old, wrote in a June 1 letter to his investors. "We did reduce risk but not fast enough. We did hedge but not well enough. And we did re-enter some markets that we had exited, prematurely, as it turned out."
Mr. Hall's setback comes amid a debate on Capitol Hill about whether big banks that take in government-insured deposits should be permitted to let aggressive traders like Mr. Hall invest the bank's cash. A legislative proposal, known as the Volcker rule after former Federal Reserve Chairman Paul Volcker, would curb so-called proprietary trading within banks. Partly as a result, a number of traders are considering leaving for hedge-fund firms or have done so.
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Late last year, Citigroup agreed to sell the unit Mr. Hall headed, its lucrative Phibro LLC energy-trading business, for a bargain-basement price. The unit churned out hefty profits, but Citigroup, which had taken substantial government aid in the financial crisis, came under pressure from the U.S. government's pay czar to spring Mr. Hall in light of his big paycheck.
Some felt the move was misguided given Mr. Hall's golden touch for Citigroup. Others said his pay symbolized excessive Wall Street compensation practices that encouraged risk-taking that fueled the financial crisis.
In addition to continuing to run Phibro, which was purchased by Los Angeles-based Occidental Petroleum Corp., Mr. Hall also is running his own hedge fund business, Astenbeck Capital Management LLC, where he has seen the losses.
Whether Mr. Hall's performance is related to his new environment remains unclear. He declined to comment.
Money managers say life within a bank sometimes can be easier than in the hedge-fund world. With large balance sheets that can absorb losses, banks sometimes allow a trader more leeway for bets, such as by providing additional capital, and can help traders absorb losses.
Lately, Mr. Hall, an oil-and-gas specialist, has been reducing his "overall risk exposures," he told his investors, despite continued optimism about energy prices. It isn't clear how the group has done in June.
Mr. Hall "was incredibly successful but his strategy has volatility, and at a bank there's an implicit or explicit backing of your activity, whereas a hedge fund has a finite amount of capital," said Charles McNally of Lyster Watson & Co., which invests in hedge funds.
The challenges for Mr. Hall, one of the world's largest collectors of contemporary art, reflect the tough times many hedge-fund managers are facing after a postcrisis rebound in 2009. The average commodity-focused hedge fund was down nearly 5% through May, according to Hedge Fund Research Inc.
Other hedge funds trading in a variety of investments also had a rough May, including veteran trader Louis Bacon, who showed a decline of 9.2% in the month in his firm's largest fund.
These managers sometimes can quickly turn their performance around. Mr. Hall's team showed a decline of nearly 10% in July 2008, for example, before ending the year with a gain of almost 5%.
Occidental spent about $370 million for Phibro, a price that essentially was the value of the unit's net assets at the time of the deal.
The company has said that Phibro's earnings for this year's first quarter weren't significant to the oil company.
"Over months performance tends to even out, you can't take a month as indicative of what a year will look like," said Occidental spokesman Richard Kline. "We believe Mr. Hall has tremendous insight and is an outstanding asset to Occidental."
At Citigroup, Phibro's earnings averaged $371 million a year for the five years before the deal, and the fund was consistently profitable for more than a decade.
The profits and a pay package that allowed him to keep a big percentage of the unit's profits helped Mr. Hall earn compensation of around $100 million in 2008; he was on tap for a similar package last year.
Since jettisoning Phibro, Citigroup has begun rebuilding oil-and-metals trading in its commodities unit. After keeping headcount flat last year, the commodities business is expected to grow by 10% to 15% this year, according to bank officials. The government still owns about 20% of Citigroup and has been steadily selling its stake.
Mr. Hall and his team began running their hedge fund and managing money for some outside investors in 2007 while still at Citigroup, fund documents say.
In raising money for his hedge fund this year, the British-born Mr. Hall demanded a $25 million minimum investment, well above the $5 million or so that many funds charge. He charges a more-typical 2% management fee on assets and 20% of any profits.
Mr. Hall owns 80% of Astenbeck, based in Westport, Conn. Occidental owns the remaining 20%, Astenbeck documents show.
Mr. Hall, who obtained a chemistry degree from Oxford University, has more than $1 billion in the offshore version of the fund, according to a securities filing this week, making it one of the largest commodity-focused hedge funds. He has $50 million of his own money in the hedge fund, according to fund documents. Mr. Hall profited in recent years by turning bullish on energy prices before most others in the market. He generally likes to establish long-term strategy, and doesn't always trade markets actively, though others on his team do. In his June letter to investors, Mr. Hall sounded an upbeat tone about energy prices and precious metals.
"It is our belief that we are not on the eve of another 2008 Lehman event," he wrote.
Mr. Hall argued that oil consumption is rapidly recovering. He said the huge oil spill in the Gulf of Mexico will push prices higher, though the spill and potential government taxes on energy producers might hurt shares of some companies.
"Much of the world's incremental oil production over the next decade was meant to come from" deep-water offshore locations, he told investors. "At a minimum, costs will now be significantly higher due to more stringent safety measures … this will remove oil from the market and also as importantly raise the price hurdle for future investments."
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