Being a commodities hedge fund manager is an increasingly lonely pursuit. Specialists in fuels, crops and metals have been exiting and few new arrivals are taking their place.
This class of traders once threw its weight around in futures markets. In the past 12 months, firms such as Jamison Capital Partners, Madava Asset Management and Astenbeck Capital Management have shut down funds, the latest in a prolonged retreat.
Extracting profit from commodities trading has become more difficult as ample supplies calm prices, market-moving information becomes broadly available and automated traders leap ahead of participants taking a more considered view. David Mooney of Casement Capital, a veteran investor in the sector, says commodities hedge funds are undergoing “an extinction event. Just about everyone has gone out of business.”
But surviving managers see opportunities — just not where commodities hedge funds scored big in years past.
Even as marquee names shut down, Jonathan Goldberg, who leads New York-based BBL Commodities, has launched a second fund in addition to the energy-focused one he established in 2013. This one will use commodity signals to trade equity indices and currencies.
Mr Goldberg, speaking at the FT Commodities Global Summit last month, agreed that trading had become tougher compared with when fundamental information was harder to find.
“Has it become impossible? No,” he said. BBL returned 2 per cent in 2017.
A former trader at Goldman Sachs and Glencore, the commodities trading house, Mr Goldberg said the “speed at which the market interprets new data has definitely changed. So I think the funds that have done well and have succeeded are adapting to that new dynamic.”
Adaptation includes trading less in the most active futures contracts and more in those with later delivery dates, or focusing more on “relative value” trades that track price differences between one contract and another, such as crude oil and diesel made from it, he said.
Sebastian Barrack is head of commodities at Citadel, the $28bn Chicago-based hedge fund. As a multi-strategy group, Citadel is involved in a variety of markets. But the unit Mr Barrack runs would rank as one of the world’s largest commodities hedge funds if it was independent, he told the summit.
Mr Barrack said many commodities funds maintained a bullish bias during the raw materials rally of the previous decade, flattering their results until markets turned lower. The decline in volatility across financial markets also hurt many fund managers.
But he argued the broader availability of commodities information had empowered the hedge funds that know how to process it, giving them a window into flows once reserved for owners of commodities infrastructure and physical merchants. Citadel has “as good an opportunity today as ever before”, he said.
David Lilley, a co-founder of Red Kite, an influential London-based metals hedge fund, recently formed Drakewood Capital Management, another commodities investment group. He suggested the winnowing of commodities funds was improving the outlook for survivors. “The lack of discretionary money that’s trading those opportunities means those opportunities are available to be picked up,” he told the summit.
Undoubtedly, fund managers seeking to retain investors are more likely to speak better of opportunities than those pulling down shutters. Assets managed by commodities hedge funds totalled $21.9bn at the end of 2017, down from a peak of $28.3bn in 2012, according to Hedge Fund Research.
“Commodity trading is tough, with no coupons, dividends, or real price appreciation over time to soften the blows. It’s becoming even tougher,” Jamison Capital’s Stephen Jamison said in a letter reported by Reuters. Mr Jamison, who did not respond to a request for comment, added in the letter that technologies such as artificial intelligence had removed short-term trading opportunities.
The falling population of commodities hedge funds is in contrast to booming activity in futures markets, partly fuelled by money managers. CME Group, the world’s biggest exchange operator, reported record volumes of energy and metals contracts in the first quarter, while agricultural volume was up 26 per cent from a year before.
But an increasing share of the volumes is coming from computerised trading firms and investors using commodities as a proxy for broader economic trends, not commodities specialists counting barrels or bushels. In oil, the biggest commodity market, “the lesson learnt over recent years is that the herd mentality is strong and tourist traders cycling in and out of positions can make for violent price swings”, Michael Tran, an analyst at RBC Capital Markets, said in a note.
Andy Hall, a famed oil manager, charged that with the rise of algorithmic trading, “using an approach based primarily on fundamentals has therefore become increasingly challenging”, according to a letter to investors issued as he shut Astenbeck’s main fund last year.
Yet Marwan Younes, chief investment officer of $250m commodities fund Massar Capital Management, said the growth of computerised or exotic trading was less a bane than a blessing. The more these strategies push prices out of line, the better for the hedge funds that understand fair value, he said.
“Are fundamentals more challenging to trade? In fact, it’s quite the opposite. The algorithmic community . . . actually creates opportunity for discretionary managers such as myself,” he told the FT in an interview.
Additional reporting by David Sheppard in London