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Originally published February 20, 2009 at 12:00 AM | Page modified February 20, 2009 at 9:03 AM

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In Texas, a king of the Asian commodities market

Just a third of hedge funds with assets of more than $100 million had positive returns in 2008, according to data compiled by Bloomberg. Abraham Trading Diversified Program, a small operation in rural Texas, was up 30 percent in 2008

Bloomberg News

CANADIAN, Texas — It's late on a Sunday evening in October, and Salem Abraham is the last diner at the Cattle Exchange steakhouse. Abraham is a businessman and lifelong resident of this tiny oasis of a town — population 2,277 — nestled among cattle ranches in the desolate Texas Panhandle, its green hills watered by the Canadian River.

Wearing jeans and a white shirt, Abraham takes his time finishing his peach cobbler. Then he moseys upstairs to his office, in the same building, to check on the market.

It's not the local cattle auction he looks into. It's the Asian commodities and currency markets. Abraham is the president of Abraham Trading Co. (ATC) — a $300 million hedge-fund firm that buys and sells futures contracts in 60 markets around the world.

Abraham, 42, owns the 99-year-old Moody Building housing the steakhouse. In fact, he owns nine buildings along Canadian's Main Street, including the old movie theater, which he spent $1 million renovating.

Abraham doesn't need to be in Chicago or New York to make money. His Abraham Trading Diversified Program, which uses mathematical models to track trends in the markets, was up 30 percent in 2008. The program determines trades in four ATC hedge funds.

Just a third of hedge funds with assets of more than $100 million had positive returns in 2008, according to data compiled by Bloomberg. The Standard & Poor's 500 index fell 41 percent last year.

New investors are pouring into ATC, and the fund firm is on course to grow to $500 million by June.

Abraham has also made millions of dollars over the years selling the water beneath his and his neighbors' land and in lucrative real-estate transactions.

"He's the only money manager who's made me any money this year," oilman T. Boone Pickens said in November. "And that includes myself."

Abraham and Pickens are sometime business partners and, by Texas standards, neighbors. Pickens' 68,000-acre ranch is 20 miles from the Abraham family's 27,000-acre spread.

Pickens, a longtime oil tycoon, says he lost $2 billion in 2008 by making bad bets on the direction of oil and gas prices. He declines to say how much he has invested in ATC funds.

Abraham has been making money for his investors consistently for two decades. His firm posted a 21.8 percent average annual return for the 21 years ended in 2008. One thousand dollars invested in January 1988 was worth $82,000 at the end of last year.

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"They are different from the crowd," says Grant Jaffarian, chief investment officer at Efficient Capital Management, a hedge fund firm with $1.2 billion under management, who has invested in ATC. "They spend a lot on research and are passionate about what they do."

Commodity advisers

ATC and its seven traders are known in the hedge fund world as commodity trading advisers, or CTAs, though CTAs don't invest only in commodities.

The firm is about 60 percent invested in metals, oil, gas, orange juice, milk and live cattle. Abraham also bets on the movement of currencies, interest rates and stock market indexes.

"Trends can last a few hours or days," says Barry Sims, director of operations. "On some trades, it can last a few months."

The firm makes as many as 50 trades a day. Three times a day, its computers churn out 100-page reports describing the firm's positions and saying what new actions it should take.

CTA firms in London and New York typically hire Ph.D.'s in mathematics, economics and physics to do the computer programming behind their trades. Abraham's traders are local hires who are trained on the job.

"We don't have people with fancy résumés," Abraham says.

ATC trader Shane Sawyer was an assistant manager at a feedlot in Kansas before taking a job with Abraham.

"At a feedlot, you're working from sunup to sundown," says Sawyer, who has an agriculture degree from Abilene Christian University. "It was an easy choice to make, and it smells better."

Father of eight

Abraham, a father of eight children who has a finance degree from the University of Notre Dame, wrote the original ATC trading program himself and does most of the firm's research.

He gets assistance from his first cousin, Mark Abraham, and Larry Smith, a former mortgage and debt broker in Las Vegas. The trio search for patterns and correlations that can divine a market's direction.

ATC profited in 2008 when its computer models predicted that the price of metals, particularly zinc and nickel, would sink as industrial production in China, India and the West declined. The zinc price fell 49 percent for 2008, while nickel declined 55 percent.

Abraham also bet that the British pound would lose value against the dollar — it sank 26 percent — and that the yen would grow stronger, another winning trade.

This year, Abraham predicts — without benefit of computer models — that base metals and crude oil will double in price as the world's economies begin to grow again.

Another trend he sees is a rise in inflation triggered by the U.S. government's decision to pour new money into the financial system.

"It's to everyone's advantage to believe the dollar has some value and isn't just paper and ink," Abraham says. He's buying Treasury inflation-protected securities, or TIPS, to guard the value of his assets. "It's like putting on a car seat belt; it's insurance," he says.

Family business

The Abrahams have been traders for generations. Salem's great-grandfather emigrated from Lebanon and settled in Canadian in 1913. It was then a bustling cattle center, and the immigrant sold jeans and other clothing to the cowboys.

When Salem headed off to Notre Dame in 1984, he knew he would emerge as a businessman. He didn't know what kind until a chance encounter at a party in 1987 with Jerry Parker, founder of Richmond, Va.-based hedge fund firm Chesapeake Capital.

Parker — who still runs Chesapeake — introduced Abraham to the concept of "managed futures," buying commodity futures contracts based on the recommendations of trend-following models. He invited the student to visit him sometime to discuss the concept further; Abraham showed up in Virginia three weeks later.

Salem's grandfather had given him and his two brothers, Eddie and Jason, $50,000 each to do with what they wished when they graduated from college. In his senior year, Salem asked for his cash early so he could trade futures. He would rise at 7 a.m. to do research then trade until 10, before heading off to class.

"He was always more together than the rest of us," says Mike Nelligan, a college friend. "He had high expectations for himself and knew he was going to be successful."

By mid-October 1987, Abraham's $50,000 had grown to $66,000. Then on Oct. 19, the stock market crashed, falling 22 percent that day. Abraham lost half of his money.

"That was a great lesson: Don't trust what they teach you in statistics class," Abraham says. "The things they say can never happen, can happen."

After school, Abraham returned to Canadian, as he had always planned. He married his high school sweetheart, Ruth Anne, and their eight kids range in age from 16 to 5.

In 1988, Oofie Abraham set up his three grandsons in a new business. Abraham Investment Co. bought and sold oil and gas leases and ranch land. "We would buy a ranch, fix it up and sell it," Eddie Abraham says. "If we couldn't sell it, we'd operate it for a while and run cattle on it."

Eddie, 44, is the real cowboy of the family. He loves ranching and used to compete in "cowboy action shooting" — a quick-draw and target-shooting contest. He won the 2004 world championship in the derringer class.

Hedging the bet

Even while he worked in the company his grandfather set up, Salem remained transfixed by managed-futures trading. So he started a business on the side, writing his own program on his home computer — a Tandy 1000 — and drawing up charts by hand.

His two brothers together put in $25,000, and his grandfather added $30,000, to bring his trading account to $100,000.

Oofie's contribution came with a proviso: If Salem lost half of the money, "we close the business and throw the quote machine out the window," in Salem's words. The elder Abraham died in 1994.

Losses piled up. By mid-May 1988, Abraham was down to $68,000. "My grandfather would rub his hands and say, 'It won't be long now,' " Abraham says. By the end of May, the grain markets turned, and Abraham's positions in soybean, wheat and corn futures took off. He finished the year up 142 percent.

His courage buttressed by his success, the 23-year-old made a cold call to Commodities Corp., a Princeton, N.J., trading firm. Abraham got through to Elaine Crocker, then an executive vice president. That 10-minute conversation led to a meeting in Houston.

Abraham had a one-year track record. So Crocker and her colleagues subjected him to a lengthy interrogation and asked to see a 10-year simulation of his computerized trading system. He passed the test, and Crocker sent him a $200,000 check.

"He's an extraordinary negotiator," says Crocker, now president of Bacon's hedge-fund firm, Moore Capital Management. "He did a nice job of getting us to fund him."

Crocker's bet paid off. Abraham posted returns of 90 percent in 1990 and 24 percent in '91. Although he lost 10 percent in '92, he came back with gains of 34 percent and 24 percent in the following two years.

New investors poured in, and Abraham ended 1995 with $132 million under management.

Then he hit a dry patch. As tech and Internet stocks soared in the late '90s, commodities lagged. Abraham's main fund was averaging 5 percent gains a year — a return that was about average for CTAs in the period.

Able to wait it out

One advantage Abraham has over his CTA competitors is that he's willing and able to take physical delivery of commodities he buys if he can't sell them at a good price.

In April 2006, he bought $6 million worth of ethanol futures contracts on the Chicago Mercantile Exchange, expecting the market for the gasoline substitute to take off as oil prices rose.

Ethanol prices did rise 54 percent by mid-June. Yet when Abraham tried to sell, he found no buyers because, he says, ethanol contracts are thinly traded and short sellers were trying to drive down the price.

"It became a game of chicken," Abraham says. One short seller even called to warn Abraham that other traders wanted to force him to sell at a loss.

"I told him this game of chicken is going to go longer than you think," Abraham says. "Being country boys, we are not afraid of dealing with physical commodities."

ATC had 3,000 tons of ethanol delivered to railroad cars in various locations. Abraham says he then found buyers and sold it for a profit he declines to disclose.

Investors flocking

In the wake of today's financial crisis, ATC is attracting money from institutional investors. To keep the money coming, Salem has revised his trading system to smooth out performance, which for commodities funds can swing 25 percent in a single month.

"Most fund managers are ready to quit when a trader is down 25-30 percent," says Joe Wade, president of Centennial Partners, a $750 million fund of funds based in Memphis, Tenn., that's an ATC investor.

For most citizens of Canadian, Salem's complex mathematical models are a mystery. They know him and his family better as involved neighbors. In addition to sitting on the school board, Salem coaches local flag football and peewee baseball teams.

"As successful as Salem has been, he didn't have to come back to Canadian," says Jackie McPherson, head of the town's chamber of commerce. "He's given so much back to the community."

Copyright © 2009 The Seattle Times Company

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