The Interview - Lars Steffensen, Ebullio Capital: "Industrial production and GDP figures from the rest of the world are right and the figures from China are wrong"

Ebullio Capital managing partner Lars Steffensen believes that as the world's economy tips downward again in the second leg of a W-shaped recession and central bankers court hyperinflation as they ride to the rescue, the Ebullio Commodity Fund will profit by going short on the way down and then going long once real signs of recovery emerge.

HW: What is the background to your company and fund?

LS: The Ebullio Commodity Fund is a pure discretionary commodity hedge fund. Ebullio invests in all commodity markets via futures, options and some physical trading. A discretionary approach is employed along with additional technical and fundamental signals, with hedging strategies applied.

Ebullio Capital aims to achieve annualised returns of 20 to 30 per cent and has a wealth of talent and experience in trading all commodities. The Ebullio Commodity Fund has capacity of USD500m and opened to outside investment in October 2008. The fund currently has assets of USD64m.

The fund is characterised by transparent risk management techniques, standard deviation of 5 to10 per cent, with a positive rolling 12-month period, a single commodity margin to equity ratio not greater than 10 per cent and total fund margin to equity ratio not greater than 20 per cent.

The fund is an open-ended, Cayman-incorporated mutual fund with its base currency in US dollars and a minimum subscription of USD100,000. Subscriptions are monthly and redemption notice is 30 days.

Ebullio carries out event-driven and technical trading of futures and options of all commodities, including trading on an opportunity basis of energy, agricultural and soft commodities, physical trading of LME metals such as copper, nickel, zinc and lead, and event-driven and technical trading of futures and options in LME and Comex metals, Nymex energy and Comex and London bullion.

I am the managing partner and director of commodity trading group. A graduate of Denmark's University of Aarhus, I have 22 years' experience in the commodities and metals trading industry with vast multistrategy experience, including directional, spreads, physical and arbitrage. I have returned an average of 40 per cent per annum since 1987.

Partner and commodity trader David J. Sutcliffe has experience in soft commodities and industrial metals, and specialises in the trading of futures, spreads and options of LME metals. Commodity trader Gregory Cain studied international finance and financial markets at France's Ecole Supérieure de Commerce, writing a thesis on pricing credit derivatives and market risk. He too specialises in the trading of futures, spreads and options of LME metals.

HW: Who are your key service providers?

LS:  The custodian for segregated accounts is JP Morgan, while the fund administrator is GlobeOp Financial Services and the auditor is Kinetic Partners. Our legal advisers are Walkers in Cayman and Cummings & Co. The fund's prime broker is Marex Financial and other various executing brokers. The compliance adviser is Complyport.

HW: Have there been any recent changes to the management team?

LS: In line with market development and with our client-centric focus, we recently opened a US office in Denver, Colorado, run by David Maynard, to service new and existing US clients and help US investors gain exposure to our Ebullio Commodity Fund.

Denver's positioning in terms of geography and time zones enables us to service our existing clients comprehensively with an eye on any new opportunities. We feel that our commodity fund offers a type of risk and exposure that is becoming extremely appetising for the US market, and the regulated and compliant nature of our fund makes it a tremendously attractive proposition.

David heads investor relations in the US for Ebullio. During his 20-year career in commodities and trading, he has been a trader, marketer and analyst for some of the world's leading investment banks as well as mining and metals companies.

HW: What is your investment process?

LS: It is based on a qualitative assessment of risk and return characteristics of the trading strategies, involving intensive analysis of the underlying fundamental, quantitative and technical market picture.

HW: How do you generate ideas for your funds?

LS: We obtain a significant informational advantage over conventional commodity funds from involvement in the physical commodities markets. We gain valuable and timely insights from sentiments and trends that drive prices in the futures market. A physical trading strategy contributes healthily to absolute returns and provides Ebullio with great flexibility in the trading of calendar structures.

HW: What is your approach to managing risk?

LS: We create daily NAV and trade/position statements and audited monthly transparent performance reports. The fund has low credit risk due to exchange derivative focus, and counterparty insurance is taken for physical transactions. We use option hedging strategies, while all physical transactions are fully hedged. In addition, we employ a risk management suite, and positions are slowly scaled into.

HW: How has your recent performance compared with your expectations and track record?

LS: Our recent track record is more in line with our targeted returns of around 20 to 30 per cent. May 2009 was a decent month for the Ebullio Commodity Fund and we took pleasure in reporting a net return on capital of 2.91 per cent for the month, which brings our total return for first five months of 2009 to 13.76 per cent and since launch to 118.32 per cent.

In line with our philosophy of being an opportunistic and aggressive but conservative capital manager and with our validated trading strategies, we spent the equivalent of around 10 per cent of the month's return on options in May in order to ensure a limited downside on our positions.

HW: What opportunities are you looking at?

LS: We continue to believe that the grotesquely bad industrial production and GDP figures from the rest of the world are right and that the figures from China are wrong - call us cynics, but we just don't believe that China can keep reporting electricity output down 25 to 30 per cent with the rest of the economy going ahead unchanged or even allegedly growing.

Furthermore, we believe that most of the Chinese stimulus cash is being used by various state entities and semi-state entities to speculate in all asset classes, because they full well know that actually consuming stuff will just lead to the production of unsellable product. So the perceived massive Chinese demand is basically bogus and these sorts of scenario normally end in tears.

HW: What events do you expect to see in your sector in the year ahead?

LS: We still believe that we are looking at a W-shaped pattern from the middle of last year. We collapsed, have recovered on irrational exuberant optimism and massive quantitative easing, but it won't be enough, and as more horrible macro figures will show over the next six months, we will collapse again.

Then the Fed, the Bank of England and even the European Central Bank - once Angela Merkel finally realises that the German export model is broken - will throw so much money at the world that they pass the point of no return on hyperinflation. But we need another down leg to provoke the central banks to throw any pretence of caution to the wind and start completely destroying their own currencies.

In Weimar Germany, the central bank decided that the only way to pay off massive debts incurred through massive government spending on the war effort, war-related reparation payments and a massive domestic stimulus to protect German industry from the results of the war-induced collapse in world trade and German exports was to print money. The results are well known and had horrific consequences. The result for commodities was a booming domestic price, which killed consumption and industry and the world price actually collapsed.

HW: How will these developments affect your own portfolio?

LS: As, if and when the trend turns, we will be short on the way down and remain vigilant for real signs of recovery and then get long for the long term. Sell in May and go away may not be entirely appropriate and out by a couple of months this year, but we still agree with Frank Sinatra: "That's life/That's what all the people say/You are riding high in April/Shot down in May..."



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