Marijuana Bets Stoke Hedge Fund's Ascent to Top With 145% Surge

(Bloomberg) -- Bets on marijuana companies helped an Australian manager soar 145 percent last year to become the world's best-performing hedge fund.

Stock and credit investments in North American marijuana producers contributed to 22 percentage points of last year's gain for the $200 million Tribeca Global Natural Resources Fund, said Sydney-based Ben Cleary, who co-manages the pool with Craig Evans. The fund has advanced 4 percent this year through February, Cleary said.

The wagers helped the hedge fund rise to the very top among more than 10,000 rivals tracked by data provider Preqin and stand out in a lackluster year for the industry. Eight U.S. states and the District of Columbia legalized recreational cannabis use among adults and more than half the country's states have laws allowing medical use of the drug. While federal laws prohibit the sale of marijuana and officials from Donald Trump's administration have sent mixed signals on whether they would increase enforcement, Cleary said he isn't concerned because cannabis laws are state-based.

“People have voted with their feet at the ballot box,” Cleary said in the email. "Financing to this sector is still incredibly hard to find and the cottage-like mum-and-dad industry is prime for consolidation in the U.S."

The U.S. legalized cannabis industry's revenue hit $6.7 billion last year and is highly likely to surpass $20 billion in five years, Cleary said. The industry will expand to $50 billion by 2026, Cowen & Co., the former bond brokerage aiming to become Wall Street's leading provider of cannabis research, estimated in September.

Generation Y

"This will have far-reaching impacts, including lower beer sales, as Generation Y gravitate towards the ‘low carb' alternate," Cleary said.

Stock prices of Aurora Canabis Inc. and Canopy Growth Corp., both medical marijuana producers which the Tribeca fund has invested in, more than tripled last year and have advanced 12 percent and 30 percent this year, respectively.

The fund also made money in 2016 from investments in salmon producers in Norway, Australia and New Zealand, including Tassal Group Ltd. and Sanford Ltd. Price of the fish surged with solid demand from most Group of 20 countries and constrained supply from Chile and Norway. Consumption in the U.S., the largest market for salmon, expanded at double-digit rates between 2013 and 2016. A rising health-conscious middle class in Asia, especially in China, has developed a preference for the fish over red meat, Cleary said.

Cobalt, Lithium

Cobalt and lithium companies in Asia, Canada and Australia, such as Galaxy Resources Ltd., proved profitable trades last year amid battery demand of the growing electric car industry, while bearish bets on the fertilizer industries in Europe and North America also paid off. Cleary says the oversupply of urea and ammonia, fertilizer ingredients, to continue in 2017. The increasing use of drones to report moisture and mineral content in soil could rapidly reduce fertilizer usage on crops, he added.

Salmon, cobalt and gold also drove the fund's returns so far this year, Cleary said. The fund has cut overall net position, the difference between bullish and bearish bets, to 30 percent, from about 50 percent last year, as the surges of stock prices in the past year have made cheap investments harder to find, he said.

Cleary and Evans both worked in the equities division of Macquarie Group Ltd. in roles focused on natural resources. The fund, using a strategy started in September 2014, can invest in stocks, credit of resources companies, related service and infrastructure providers as well as commodities. Its investors are dominated by Asian and U.S.-based rich families, Cleary said.

The end of the 30-year bull run for bonds may spur investors to pump money into riskier assets, potentially benefiting natural resources companies, Cleary said. Most of the commodities it analyzes are going into supply deficit in 2017, he said.

"Few are focusing on the fact that most commodities have faced five to six years of under-investment," he said. "This has left most major producers of commodities with next to no growth and we do believe there will be significant mergers and acquisitions in 2017.”

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net.

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Robert Olsen