Showing posts with label Glencore. Show all posts
Showing posts with label Glencore. Show all posts

Monday, 1 April 2013

Asteri Capital and the London Whale: A secret history of Glencore's hedge fund


The global commodity trading giant Glencore once had an internal hedge fund that made proprietary bets on global markets. It was called Asteri Capital. What do you think it bet on? Most people would probably make an educated guess and say commodities, but they'd be wrong. It bet on global credit markets, bonds, structured credit products and credit derivatives that have nothing to do with commodities.

Weirdness level 1: Why did Glencore have a credit hedge fund?
Ok, that's pretty weird. Why would a commodity company like Glencore have a bond-trading hedge fund? Asteri Capital actually started life as something called Glencore Finance AG, and was, for all intents and purposes, just a proprietary trading desk within Glencore, based out of its 50 Berkeley Street office in London. It furthermore appears that it was originally just part of Glencore's treasury, the part of the firm that deals with things like borrowing money for the day-to-day operations of Glencore and managing its cash flow. Here it is from the horses mouth (I've added in comments in square brackets):
"Glencore International AG [the Glencore parent company] funded the investment activities of Glencore Finance AG [The prop trading desk] on a trade-by-basis [Translation: Whenever it felt like it]... Proceeds from the sale of investments (including capital gains) were returned to Glencore's treasury [Translation: Glencore's treasury was the hedge fund]. Unlike an investment fund, realized profits did not serve to increase Glencore Finance AG's funds under management [Translation: Profits went to Glencore's treasury instead]... Glencore Finance AG was historically engaged in certain investment strategies which Asteri Capital Ltd (the Fund) will not pursue in the future [Translation: Asteri is a more limited successor operation to whatever we were doing before]."
This Glencore proprietary trading operation was started by a guy called Evan Kalimtgis, who left Dresdner bank in April 2005 - along with several other Dresdner traders like Athanasios Stavrou, Phil Burford and Matt Johnson - to take up residence at Glencore Finance AG. Initially it was just a group of guys who got thrown money whenever the Glencore treasury felt they had a worthwhile trade to put on, and any cash they made got returned to the treasury. After a while though, they gained some nominal independence, and in December 2006 they started accepting outside investment, becoming Asteri Capital Ltd, an FSA authorised investment firm.

In his LinkedIn profile, Athanasios Stavrou describes himself as: "instrumental in setting up Asteri Capital (a multi-strategy credit hedge fund with $450mil in assets under management) and creating the initial track record that led to raising external funds in 2006. Managed the long/short structured credit strategy ($100mil) and co-managed the High Yield Fundamental Credit Portfolio Strategy ($125mil). Both involved directional, relative value, macro and fundamental credit investments through bonds, loans, credit indices and credit derivative products." 

Other LinkedIn info come from Matt Johnson (now at hedge fund Makuria) who describes Asteri as a "multi-strategy credit hedge fund of Glencore" doing "correlation, vanilla and bespoke portfolios... relative value credit trading... convertibles strategy, credit volatility... and prime lending".

Weirdness level 2: Whale ahoy!
So, Glencore's treasury was harbouring a kind-of-secret credit hedge fund. Does this sound familiar? If you've been following the J.P. Morgan London Whale saga it probably does: J.P. Morgan basically set up a hedge fund in its Chief Investment Office, a part of the firm that is supposed to do risk management alongside the treasury, not proprietary trading. A trader called Bruno Iskil was placing massive bets on credit derivatives, which ended up losing J.P. Morgan some $6 billion.

Which brings us to the second weird part of the story. In October 2008 the Asteri Capital team breaks up. Lehman had just gone bust and it was a pretty bad time for global credit markets. Maybe Glencore was cashing out (or cutting their losses), but the team splits and drifts off to various hedge funds and banks. The leader, Evan Kalimpgis, ends up at none other than J.P. Morgan, where he is hired as co-head of risk management in the Chief Investment Office, alongside Achilles Macris, who he used to work with at Dresdner. They find themselves presiding over a guy called Bruno Iskil, aka 'the London Whale'. So, yes, the guy that was responsible for running Glencore's internal treasury hedge fund was the same guy that was later Bruno Iskil's boss at JP Morgan. The moral of the story thus, is that Evan specialises in working in treasuries that ain't really treasuries.

Weirdness level 3: Some political skeletons in the closet
Let's add one final layer of weirdness for good measure. Back when Evan Kalimtgis was running Asteri, he worked alongside a guy called David P. Goldman, a credit strategist. Goldman also happened to have worked with Evan's father, Kostandinos Kalimtgis, on a late-70s book called Dope Inc, sponsored by a guy called Lyndon LaRouche, which argued that the financial elite in the City of London controlled the global drugs trade. Goldman says he was under the "gnostic cult of Lyndon LaRouche" before breaking away and going all neocon and Wall Street. It seems he and Evan's dad turned on Lyndon: Check out the July 15th 2008 comments by a guy called Roger Moore under this post here. Goldman was, until 2009, writing political commentary under the pseudonym 'Spengler', which he admits here.

Calling all investigators! 3 questions that need answering
Glencore, Lyndon LaRouche, global credit trading, London Whale, secret hedge funds? I mean, WTF? This may be a conspiracy theorist's dream, but I don't have the time to investigate. If anyone else has the inclination to go after this though, I'm interested in three questions:
  1. Why was Glencore hosting Asteri in the first place? Did the Glencore management know the guys originally? Were they doing them a favour? Was it part of Glencore's overall strategy, or just an ad hoc add-on to their commodity trading business?
  2. What was Evan Kalimpgis doing at J.P. Morgan after leaving Asteri Capital, and why did he leave before the London Whale scandal broke? Is there any connection between the activities in the two firms he was part of? Is their a crew of traders who hop through corporate treasuries doing proprietary trading instead of risk management?
  3. What is all this stuff about Lyndon LaRouche? How does Goldman go from writing about City of London conspiracy theories to analysing credit derivatives, and why does he end up hanging out with the son of his former writing buddy at a hedge fund in Glencore?
Maybe there are really boring answers to all these questions, or maybe it's a Hollywood film in the making, but please do send links, comments or suggestions if you find anything out.

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Sunday, 19 February 2012

Glencore in the DRC: Building a case for shareholder activism

Over the last year I've become somewhat intrigued by Glencore and other physical commodity traders. Part of that interest comes from my work on commodity speculation, and the fact that much of the analysis around that issue has focused on investment banks and hedge funds rather than the companies that actually deal in physical commodities. Part comes from my fascination with figuring out how the global trade system works. Glencore has the added draw of being a notoriously opaque and secretive company, with a controversial and swashbuckling ex-captain who made a name for himself by doing deals that no-one else would do. Trying to figure out how their vast commodity operations work is a detective mystery if ever there was one.

In May 2011 they went public and listed on the London Stock Exchange. That means they sold ownership stakes to investors via the UK market. Technically speaking though, they only sold about 12% of the company, and technically speaking, they're not based in the UK. Rather, Glencore is based in the Canton of Zug in Switzerland, which is, to use the words of the Canton's publicity team, renowned for 'its business-friendly mentality'... which is to say... um... low taxes. For tasks other than tax accounting, Glencore has other cosy offices, like the one in London, on Berkeley Street, next door to the Sainsbury’s that I used to buy salads at back in 2010.

Stirring the copper kettle
Anyway, last week I published an article about Glencore in The Ecologist, after spending some time digging into some of their operations in the Democratic Republic of Congo. The editor put in a byline which kind of sums it up: "Moves by unknown shell companies to control lucrative natural resources may have cost Democratic Republic of Congo $1 billion in lost revenue, as UK-listed mining company Glencore under pressure to explain deals"

Sounds pretty interesting right? If you want more detail, take a look at the article, but basically it concerns two mines in Katanga Province - Mutanda and Kansuki - that Glencore co-owns and operates. Back in early 2011, their business partner in the deals - the Congolese state-owned mining company Gecamines - sold off its stakes to two shell companies listed in the British Virgin Islands, associated with a controversial diamond dealer called Dan Gertler, allegedly at a big discount. This is by no means a new story - it first emerged back in July 2011 - but it’s a story that’s been seriously underreported and one that remains unresolved. In September IMF expressed concern, and a UK MP called Eric Joyce continues to try raise awareness about these, and other deals in the DRC copper-belt (see map below).

I wanted to write about the Mutanda / Kansuki issue to help keep it in the public eye. I also noticed that most reports to date have focused on the DRC companies involved. I wanted to ask another question: How much does Glencore know about what went on?

So I did ask that, but when I phoned Glencore, it appeared they didn't think much of my query. I got to chat to Glencore's main media spokesman, a pleasant guy called Simon Buerk (who incidentally used to work as the spokesman for Shell, so I guess he’s pretty well practised with inquisitive journalists asking probing questions). Simon was actually very open and took substantial time to chat to me whilst driving on a Swiss highway. His message, as quoted in the Ecologist article, was simple: Glencore is aware of the accusations against Gecamines, but these deals involve parties external to Glencore and therefore it is irrellevant to ask their opinion on it.

It’s a line which I find difficult to accept fully. It’s true that Glencore is not legally responsible for the actions of its business associates, but can we not argue that they have a moral duty of care to their shareholders to make sure every deal they’re involved in has very robust overall governance? If nothing else, the highly non-transparent manner in which the deals took place should immediately raise concerns among the public, and shareholders, especially when it concerns the DRC, a country notorious for poor institutions. Can Glencore assure it's shareholders that they're associated with business partners that uphold robust governance standards?

Taking ownership
Then again, most of Glencore's shares are held by the company management, and a handful of institutional investors (which include Abu Dhabi based Aabar Investments, the sovereign wealth fund of Singapore, and BlackRock). Whilst the institutional investors could be encouraged to ask questions, it's difficult to get such organisations to do so. On the other hand, if I buy some Glencore shares, I become a part-owner of the company, with a theoretical right to raise my concerns with the management, who I would technically-speaking employ (see my earlier post about my experiences doing this with Centrica).

So, last Saturday I attended the FairPensions Shareholder Activism training day held at Amnesty UK's Shoreditch offices. It was attended by a whole range of people from civil society organisations, looking to use the power of owning shares to push forward progressive causes, whether it be countering tar sands in Canada, questioning arctic oil drilling, or combating tax avoidance. For my part, I took the opportunity to workshop some potential questions to ask Glencore management at their annual general meeting.

An interesting question to ask the executives would be something like this: "Recently UK MP Eric Joyce and the IMF raised serious concerns about the sale of stakes in mines you co-own in the DRC. Joyce, and others, claim that your initial partner in the mines secretly sold their stakes to shell companies associated with a person closely connected to the DRC president Joseph Kabila, and did so at hugely discounted prices. This raises the issue of what due dilligence processes you have in place when entering into joint ventures with partners in countries known for high levels of political risk. My questions to you are 1) Are you aware of these allegations related to your business associates, and 2) What procedures do you have in place to assure shareholders that the company will not be exposed to potential future damages arising from reputational risk and politically-imposed penalties and fines?"

I'd probably need to get the question more precise and I suspect the answer would be pretty generic, but that’s not the point. Glencore undoubtedly has a strong response, but the fact of the matter is that nobody has yet challenged them, and if there is one thing that I believe as a general principle, it’s that it’s always preferable to challenge power than to not challenge it.

Hey guys, can I call you StrataCore?
That's going to be all the more important now that Glencore has announced a probable merger with XStrata, which would create a commodity behemoth unlike any we've seen before (The press are calling them Glencore Xstrata, but I bet they'll call themselves StrataCore). Glencore specialises in commodity trading, and XStrata specialises in physical mining, and whatever the combined entity gets called, both companies think that there is great potential for 'synergies'. In particular, there will be increased potential for ‘geographical arbitrage’, which is a fancy way of saying the company will have superlative ability to source low price commodities whilst selling them in places where the prices are much higher. It plays into the hands of Glencore's core business model, which revolves around its ability to make money off global commodity market inefficiency (Indeed, the original way Glencore founder Marc Rich did this was by doing deals in places where commodity prices were depressed by political isolation or turmoil, a skill that requires aggression and significant exposure to gatekeepers who are politically exposed).

If nothing else, Glencore and XStrata will have synergies in the Canton of Zug, where both companies are 'based'. The combined entity will be able to share a mailbox, and a tab at the local pub.