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 Collapsing oil and grain prices caused havoc for commodity funds in
2014, with the average actively managed fund in the Lipper Global
Commodity sector losing 14.35 percent. Big names abandoned the field
altogether, and investors redeemed billions.
A handful of managers were nevertheless able to exploit the sudden
mid-year surge in volatility and the fall in prices. But even they
expect a difficult 2015 with pressure on prices to fall further.
"It's the worst place to be, but a long/short fund still has a lot
of opportunities," said Christian Gerlach, portfolio manager at
Swiss & Global Asset Management, whose Julius Baer-branded commodity
strategy was one of the few to perform well, up 6.09 percent in
2014.
Funds like Gerlach's can bet on prices going down as well as up.
"It's a market neutral strategy, so we're always hedging our
positions – that helps in such a bad long-only environment," Gerlach
said, citing profitable shorts in grains, oil and sugar.
Other top performers in 2014 were systematic managed futures funds
that use sophisticated computer models to crunch data.
Millburn Commodity and Man AHL Diversified both delivered returns of
over 30 percent in a year that saw the worst performers lose more
than 30 percent.
"Our strategy made money by shorting energy and grains, probably
similar to other CTAs (Commodity Trading Advisers), but we were also
profitable in the first half when crude and other markets moved
sideways," said Barry Goodman, executive director of trading at
Millburn Ridgefield Corporation.
Millburn's models analyze up to 20 factors in each of the markets
they trade, to generate signals that determine whether to go long or
short and how big a position to take.
Going into 2015, Millburn's positions are relatively light, using
less than 30 percent or so on average of the potential risk that
could be deployed.
"Our models have become a bit more risk averse," Goodman said. "With
only a few exceptions, like natural gas, signal strengths are
relatively modest – there are few major short or long signals."
Gerlach echoed this, saying he had a low net exposure as he was
short energy, long agriculture and flattish on metals: "We always
start small and if we are profitable we leverage up. But we haven't
yet found a real value market."
Gerlach believes drawdown management - limiting the potential risk
of bad bets - will be even more important than in 2014: "We will
look for things to bottom out - it won't be the time for really
massive short positions," he cautioned.
However, with volatility creating more divergence in performance
among different classes of commodities, he believes it is worthwhile
approaching the market again.
VOLATILITY JUMPS
The sudden jump in volatility in the summer, after a prolonged
period of stable prices, caught out some managers.
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"Because the volatility was so low, a lot of people leveraged up to
improve returns. That explains some of the huge drawdowns," Gerlach
said.
The 14.35 percent average loss in 2014 was worse than the previous
year's average drawdown of 9.98 percent and reflects the fact that
many commodities sold off hard in the second half.
The S&P GSCI, a popular commodity index, ended the year down over 33
percent, clobbered by a fall of 50 percent in Brent crude prices
since June and losses of 44 percent for the year for the energy
sector as a whole. Grains, silver and copper also sold off hard.
Barclays said 2014 was one of the "most difficult years ever" for
broad-based commodity investments, with an expected decline of some
$50 billion in commodity assets under management for the full year.
The double whammy of price falls and redemptions led to the closure
of several big name commodity strategies including those of Hermes,
Brevan Howard, Hall Commodities and Schroders Opus, a fund of hedge
funds.
The question is whether those investors who crashed and burned will
ever return. In the long-only space, investors have traditionally
used commodities as an inflation hedge, so with deflation on the
cards, gathering assets looks like an uphill struggle.
"Inflation hasn't come back and that goes hand-in-hand with the
asset class not coming back. Investors are hesitant and you see that
with the withdrawals," said Gerlach.
Barclays estimated outflows from commodity indices at about $18
billion in January-November, far greater than the previous all-time
high of $7.4 billion withdrawn over 2013 as a whole.
But Goodman said some investors were starting to look at
multi-strategy commodity funds as a diversifier to reduce volatility
and improve portfolio efficiency.
"It will come down to whether a manager can make money in different
market environments and deliver non-correlated returns," he said.
"But that requires a more complex decision-making process."
(Reporting by Claire Milhench; Editing by Peter Graff)
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