Cargill, the world’s largest grain trader, has significantly scaled down its management of commodity assets — which says a lot about the state of commodities-focused funds these days. Back in July its Black River Asset Management hedge fund and private equity unit announced plans to shutter four funds, including a commodities fund and two emerging-markets vehicles, and returned $1 billion to investors after the funds suffered losses on the back of a worldwide commodities crunch. In the past 18 months, commodities markets, from oil to industrial metals to agriculturals, have buckled under pressure from softening global economic growth. A glut of crude oil supplies and a strong dollar haven’t helped.
Cargill is not alone. In August, London’s commodities-focused Armajaro Asset Management, whose co-founder Anthony Ward is known as “Chocfinger” because of his outsize bets on the cocoa market, shuttered a $450 million commodities fund and Swiss commodities specialist Krom River Trading closed shop. Carlyle Group’s Vermillion Asset Management, whose flagship Viridian fund’s assets dropped from $2 billion to less than $50 million between 2014 and mid-2015, is restructuring to de-emphasize certain commodities investments and avoid further losses. (The firm has rebranded as Carlyle Commodity Management.)
“These are the funds that can blow up spectacularly,” says Chris Solarz of hedge fund advisory firm Cliffwater. They can only invest in a specific group of markets, and if opportunities run dry, the funds are out of luck, he adds.
The Systematic Advantage
A small group of fund managers are bucking the trend, however. The overwhelming winners, Solarz says, are commodity trading advisers, which use algorithms to try to capitalize on sustained market trends.
“CTAs have been able to capitalize on moves in markets that are not well represented in the average investor’s portfolio,” says Martin Lueck, research director at $4.9 billion systematic manager Aspect Capital. In the third quarter the Aspect Diversified program gained 14 percent, shorting energies and industrial and precious metals.
Lueck explains that unlike gut-driven human managers who rely on interpreting fundamentals, evidence-driven CTAs are direction-, sector- and scenario-agnostic: “We don’t have any built-in biases, we don’t predict whether markets are likely to go up or down, but we have the ability to get short of assets to profit from falling markets.” Many CTAs captured 2014’s 50 percent sell-off in oil, which led to a spectacular turnaround in their average performance. “That was a really hard trade to call for discretionary managers,” Lueck says. Systematic models short positions even if traders think the fundamentals say something different. By the time many discretionary traders recognized the dramatic change in oil prices, they had missed the opportunity to jump in.
What draws investors to commodities funds is that they’re uncorrelated. But the cyclical asset class is prone to booms and busts. “Both systematic and discretionary funds thrive off of market dislocations, which can be quantified as volatility,” Cliffwater’s Solarz says. With volatility making a comeback, systematic strategies may be the best way to play commodities, he concludes.
“There is a lot of uncertainty in the markets, and a systematic approach is an excellent strategy that’s able to adapt itself and take advantage of almost unpredictable events as they unfold,” says Lueck.
