Armajaro: 'Chocfinger' hedge fund retains a taste for commodities

The notion of schadenfreude - taking pleasure from someone else's pain - could not be further from the minds of commodity hedge fund managers watching their rivals crash and burn.

Last month it emerged that yet another commodity focused company, Oakley Capital, had closed its $10m fund of hedge funds due to weak demand for the strategy and the challenging commodity market backdrop.

This followed the decision by Clive Capital, once a significant competitor in the commodity hedge fund scene, to wind down its fund in September.

But Armajaro, the London-based hedge fund group whose founder, Anthony Ward, earned the nickname "Chocfinger" for his notoriously big bets on cocoa markets, takes no glory from the failures of its peers.

Harry Morley, chief executive of Armajaro, says: "I don't know Clive at all, but obviously we are aware of them and it's very sad that they have decided to close."

The chief executive is perhaps wary of dancing on a rival's grave, given the difficulties his own outfit has faced in recent years.

Assets under management at Armajaro reached a peak of £2bn in late 2010, but have since fallen to £1.5bn, where they have remained flat for the past 18 months.

This reflects withdrawals elsewhere in the commodity hedge fund industry, with investors pulling $1bn from the asset class in 2012 and more than $300m in the first half of this year, according to figures from Hedge Fund Research, the data provider.

"There has been a reduction in people's allocations to commodity funds, and we did suffer from that," Mr Morley says.

Nonetheless, the outflows have largely come from struggling funds of hedge fund investors, and have been mitigated by inflows from a new breed of investor: big ticket pension funds and sovereign wealth funds, which now represent 70 per cent of the company's investor base.

"We are running less assets than we have been at our peak, but it has not been a huge exit through the door, and the quality of [Armajaro's] investor base has never been higher," Mr Morley says.

He adds: "I definitely think there are opportunities within this space, and some of the potential investors we are talking to clearly think the same, because they would not bother talking to us otherwise."

The key to convincing large institutions to invest is improving performance across the company's six funds, which has been bumpy over the past three years. CC+, Armajaro's flagship fund run by Mr Ward, was down 6.8 per cent at the end of May, although it outperformed many of its peers last year, delivering positive performance of 11.9 per cent.

The performance of the company's second blockbuster fund, Armajaro Commodities, has been choppier, delivering returns of 3.2 per cent and 1.6 per cent in 2012 and 2011 respectively. This followed negative performance of 7.1 per cent in 2010, far below the fund's average annual performance of 9.6 per cent since launch in 2004.

Mr Morley says: "Last year was certainly not our best, and we don't feel particularly proud of it. We are paid to deliver good, absolute returns, and we have definitely done better in the past."

But the chief executive, who was lured out of early retirement on a cattle farm to become Armajaro's chief financial officer in 2008, is hopeful that he can turn the company's fortunes around.

He says: "I am feeling reasonably confident at the moment, actually, that people will start coming back to commodities. You had a period when all commodities either went up or down, whereas now different markets work in different ways and opportunities are there on a much less correlated basis."

The fund company's secret arsenal of weapons includes an in-house meteorologist and weather stations in west Africa that can detect weather patterns in North America - tools that smaller commodity funds cannot afford.

Armajaro Asset Management also shares research facilities with Armajaro Trading, the soft-commodity trading house involved in the development and exportation of cocoa, coffee and sugar.

Mr Morley believes performance improvements will come hand in hand with retaining the best staff, and he is working hard to make sure the Armajaro environment remains relaxed - and fun.

The company is famed for its role in cocoa markets, and large fishbowls filled with chocolates are scattered throughout its meeting rooms. "One of the perks is you can gorge yourself on chocolate - there is as much chocolate as anyone wants to eat," Mr Morley says.

The premises sport a table tennis table for staff to use during their lunch breaks, and every quarter the Armajaro clan head to a local pub for a quiz. Fund managers make their own teas and coffees, Mr Morley insists, adding: "If a lightbulb needs changing, then someone can bloody well change it. That is the sort of place this is."

He has tried to install a long-term, collaborative mindset among Armajaro's employees by changing the capital structure of the company so that it is 51 per cent owned by Armajaro Holdings and 49 per cent owned by staff.

"I think you need to look after your people, that is the most important thing," he says. "That is a combination of being fair in terms of how we split fees with them, and making it a fun, but very professional, place to work."

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