Red Kite Evangelicals Reap 47% Sowing Bet on China Copper Market

Red Kite Evangelicals Reap 47% Sowing Bet on China Copper Market
Michael Farmer, Red Kite Capital co-founder and Conservative Evangelical poses for a photograph in his office in London, on December 14, 2011. Photographer: Daniel Stier/Bloomberg Markets via Bloomberg.

On a dark, drizzly November morning, Michael Farmer steps to the pulpit to deliver a stern message to fellow parishioners at St. Helen’s Bishopsgate, an 800-year-old church in the shadow of the LondonMetal Exchange and in the heart of the City, London’s financial district.

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“We live in a cursed world — cursed by God,” Farmer tells the men and women who fill the church, most of them workers in the financial industry. “We live in a broken society; we have broken nations. Look at the euro zone. Life is a struggle and, in the end, is death.”

Yet those who believe in Jesus Christ need not fear, says Farmer, a thin man dressed in a charcoal suit and blue tie. Jesus will provide salvation from the daily hardships of disease and poverty — and the firings that have left thousands of City workers unemployed, he preaches.

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Farmer, 67, is a Conservative Evangelical who attends services every Tuesday at St. Helen’s, Bloomberg Markets magazine reports in its February issue. He also runs London- based RK Capital Management LLP, a metals-trading hedge-fund firm with $1.3 billion of assets under management. Its $400 million Red Kite Compass Fund tops Bloomberg Markets’ ranking of midsize hedge funds for the first 10 months of 2011, with a return of 47 percent, according to investors.

The $200 million Red Kite Metals Fund rose 34 percent, and the $100 million Red Kite Prospect Fund surged 50 percent, clients say.

China Copper Glut

RK Capital specializes in the buying and selling of copper and prospered by betting that the price of the red metal would fall in 2011 as the pace of construction in China slowed, investors say. The assessment proved correct, with copper retreating 26 percent as of yesterday from a record $10,190 per metric ton in February 2011.

Farmer says his faith makes him a better money manager by keeping him humble. The firm’s offices match his humility, featuring a simple orange sofa in the reception area, gray carpeting and walls free of art or photos. There is no receptionist; visitors press a button on the coffee table to let Farmer and Red Kite’s other co-founder, David Lilley, know they are there.

“Jesus warns us that there are many dangers to money,” Farmer says. “I know that in my heart there is greed, there is wanting just a little bit more. It helps that the Bible tells me to be wary of this and that one day I will fall off my perch.”

Tory Supporter

Farmer is active both in the church and in politics. He has given millions of pounds in donations to Britain’s ruling Conservative Party, saying it has done more than rivals to promote family values.

Farmer and Lilley, 45, aren’t just owners of futures and options contracts tied to copper; they also trade the physical metal, buying the commodity in North and South America, storing it in warehouses around the world and selling it when the price is right to companies that turn it into the wire and pipes used in the construction of homes, office buildings and vehicles.

Farmer previously ran MG Plc, which before its sale in 2000 was the world’s biggest copper trader. Lilley also worked at London-based MG. Farmer used that experience as a marketing point when he started RK Capital in 2005.

Physical trading also formed the backbone of what was once the firm’s biggest hedge fund, Red Kite Metals, which oversaw more than $1 billion at its peak, according to investors. The fund — named after an endangered bird of prey native to Europe and North Africa — proved as volatile as the prices of the metals it buys.

Volatile Metals Fund

Red Kite Metals surged 188 percent in 2006 on the back of a global commodities boom, according to investors. It then plunged 50 percent in 2007, rebounded with a 19.8 percent rise in 2008, then fell 0.9 percent in 2009 and 25 percent more in 2010, when Red Kite’s bet that copper would decline proved premature.

Clients fled the metals fund, reducing assets to $200 million as of November, investors say.

Farmer says that from 2008 to 2010, the U.S. Federal Reserve buoyed markets, including those for commodities, by pouring billions of dollars into the economy. At the same time, he says, analysts mistook China’s aggressive buying of copper as a sign that its construction boom was continuing, when in fact the Chinese were stockpiling the metal.

The sluggish world economy makes Farmer a pessimist.

“We are not very positive about things,” he says. “The world is in a bad place. We are still fighting to recover from a very serious recession, and I think it is going to go on for another four or five years.”

Derivatives Trader

One reason the assets of Compass surged ahead of Red Kite Metals is that Compass deals only in futures and options, not the physical metal.

“We avoid physical games because it includes other risks and is less liquid,” says hedge-fund investor Marcus Storr of Feri Trust GmbH, whose Bad Homburg, Germany-based firm manages 16 billion euros ($20.4 billion). “We’d rather stick to hedge funds trading mainly in equities of commodity companies and financial derivatives.”

Farmer and Lilley say clients often prefer funds that trade derivatives due to investor suspicion of money managers in the wake of the Bernard Madoff scandal. The contracts Compass buys can be more easily placed in individual accounts that clients control, they say.

The Compass fund grew 10-fold to $400 million in October from $40 million at the end of 2009.

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Red Kite Evangelicals Reap 47% Sowing Bet on China Copper Market

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