Sellers Capital’s $230 million flagship hedge fund is up an eye-popping 65.3% in the first half on natural gas and oil bets.

The Chicago-based firm netted a 27.3% return in the second quarter on the strength of its investment in Contango Oil and Gas, a Houston-based independent natural gas and oil company.

“The second quarter of 2008 was one of our best quarters ever and our third straight good quarter, though the market has declined approximately 15% in the meantime,” wrote Mark Sellers in a monthly update to investors. “Once again, our best-performing stock was Contango Oil and Gas, up 43% for the quarter.”

Sellers added that he expects the company to move toward a partial or outright sale later this year in 2008 based on its better-than-expected increase in reserves and its announcement last month that it was meeting with prospective buyers.

The firm’s long positions other than Contango did not fare well last quarter, but its hedges and  single short position in MBIA, a financials services concern, did so well that they essentially offset this, said Sellers.

“The MBIA fell 64% during the quarter and we’re still short the stock.”