* RK funds up as much as 33 pct for 3rd year of strong gains
* Sharp contrast to other merchant-funds in commodities
NEW YORK, Nov 14 (Reuters) - Metals merchant and hedge fund Red Kite Group is on track to its third year of double-digit gains, investor reports showed, indicating a rare winning streak among commodity firms aiming to be profitable in both physical trading and investing.
Three Red Kite funds are up as much as 33 percent through September, according to investor reports seen by Reuters. Two of the funds trade contracts of metals and the other fund trades physical metals as well as derivatives.
Led by veteran traders Michael Farmer and David Lilley, the funds are part of London-based Red Kite's holding company, RK Capital Management LLP. The funds, and another unit providing financing to miners, managed above $2.3 billion in total, RK Capital said on its website. That makes the group one of the largest metals-oriented trading and investment outfits.
Red Kite's run of profits since 2011 contrasts with meager returns at other hedge fund firms that also have physical commodity trading operations. Many funds focused on the energy, metals and agricultural markets are down for the year or have eked out only small gains due to range-bound raw materials prices and tough trading conditions.
The flagship fund at cocoa-and-coffee-focused Armajaro which manages around $1 billion and trades most major commodities, is up just 3 percent through October. Armajaro this week sold its lost-making physical cocoa and coffee trading unit to Switzerland's Ecom.
Oil-focused Astenbeck, a more than $4 billion fund run by Andy Hall, who also heads up trading firm Phibro, is down 5 percent.
In September, metals-and-energy-focused Clive Capital, run since 2007 by Chris Levett and with about $5 billion under management at its peak, closed after three straight years of losses.
Red Kite's Compass Fund, its largest with nearly $500 million under management, gained 13 percent in the first nine months. An investor report said the fund was focused on long/short and relative value trades in base and precious metals. Relative value trades are gaining traction in metals as investors try to reduce risk by exploiting price differentials between markets such as copper and aluminum.
Red Kite's Prospect I Fund, which runs about $120 million, was up 17 percent through September, an investor report said. While similar in strategy to the Compass Fund, it looks at longer-term price trends in metals.
Red Kite's Metals Fund, the group's oldest and managing above $280 million, rose 33 percent in the same period trading both physical metals and derivatives, another report said.
The numbers would place Red Kite at the upper end of commodity funds performance for 2013, industry sources said.
"You need a certain amount of capital and the right economies of scale to succeed in the commodities space now," said Kenneth Heinz, president at HFR Inc, a database in Chicago that tracks fund performances.
"Even with that, to be able to make the right calls in both the physical and futures markets year after year would be quite extraordinary."
Heinz said the average metals-focused hedge fund tracked by HFR lost almost 28 percent through September. The average fund pursuing a broad commodities strategy was down 1 percent.
Kara Hobbs, head of investor relations at RK Capital, declined to comment on the performance of the Red Kite funds.
A BIG BEAR NO MORE
Red Kite's long stretches of monthly gains this year suggested it had become more nimble in playing the metals markets, compared to recent years when its returns were more volatile.
Farmer and Lilley, both alums of copper trading legend Metallgesellschaft AG, founded Red Kite in 2004. The firm had a good two years before it was wrong-footed on bullish bets on aluminum and copper in 2007 and lost almost half its value.
Those familiar with Red Kite's strategy said it changed tack then, switching to a short position on copper and other metals that helped its funds to a strong finish in 2008 as the onset of the financial crisis caused a commodities meltdown.
This year, the Red Kite funds lost money only once in the first nine months, in June, when copper hit a 3-year low of $6,602 a tonne on the London Metal Exchange. It trades at around $6,955 now.
In an outlook sent to its investors last month, also seen by Reuters, Red Kite said it expected "a great deal of uncertainty" to remain in the supply-demand of base metals for the fourth quarter through 2014.
But it also said the mine supply environment appeared "extremely conducive to lower copper prices in the 2014-2016 period".
(Reporting By Barani Krishnan; Editing by Jonathan Leff, Josephine Mason and David Gregorio)