According to data provider Hedge Fund Research, specialist commodity hedge funds account for 13.6% of macro funds globally. The sector is on the rise but has a history of mixed performance as a result of supply and demand fluctuations. Futures brokerage Newedge’s benchmark Commodity Trading index said that this year, commodity hedge funds have declined 4.8% on average, as investors are concerned that demand for energy, metals and agriculture would decline because of the sovereign debt crisis in Europe and accelerating inflation in China.
However, the Duet Commodities fund, launched with much fanfare by alternative asset manager Duet in July 2010, is up 28% so far this year, has also seen a 30% net return since its inception and is on track to fulfil its promise to investors of producing at least a 20% net return by the end of this year. The fund has more than $100m in assets under management.
Tony Hall, chief investment officer of the Duet Commodities fund, said: “Our mantra is nothing moves in a straight line. We are not afraid of going short and we like volatility; we see movement as an opportunity to trade.”
In August, on the back of slowing economic growth, when other funds such as Clive Capital, the world’s largest commodity hedge fund, saw losses of 0.2%, the Duet Commodities fund bucked this trend and recorded gains of 2.6%.
Despite this success, Duet had its first monthly decline of the year in September, dropping 3.8%, while the Hedge Fund Research Commodity index, an industry yardstick, was down 3.23%. The same month, a Barclays Capital note said investors pulled almost $10bn out of commodity investments, crude futures on the New York Mercantile Exchange fell 11% while Standard & Poor’s GSCI Spot index of 24 raw materials declined 12%, the most since November 2008.
Hall founded the Duet Commodities fund and runs it with Arno Pilz, a commodities trader at Duet. Both experts in their fields, Hall came from Deutsche Bank and before that was head of distillates trading at Credit Suisse-Glencore, where he ran the oil and gas desks. Pilz has more than 15 years of experience in the metals business, following stints at UBS and Lehman Brothers.
Despite the September setback, the fund has grown quickly over the past few months. Currently open, the fund plans to “soft close” in the early part of next year at $500m of assets under management.
Hall said: “We are doing this so we can manage the money already in there and look after our investors. We also want to stop for a breather and concentrate on the portfolio – asset growth.”
The fund invests in futures, swaps and options on commodity underlyings, with 70% of the portfolio comprising directional trades using positions – either long or short – to predict the price movement of the underlying, predominantly through option strategies, and 30% relative value, determining price by looking at similar assets.
Options are often used as insurance premiums, and managers buy them for use in hedging. Duet uses options to make money on the position and not for hedging purposes.
Hall said: “Options have got a bigger spread but are less liquid than cash. We use the flat price for hedging because when it comes to move, we want to protect the position with the most liquid thing we have. Not the option, which is harder to move.”
He added: “We are commodity traders who are specialists in our field and we move the asset between the two existing silos: energy and metals.”
The aim is to end up with three tranches in oil and energy, metals and agriculture but they are waiting to find the right person to work on the agricultural side of the portfolio.
The fund trades over the counter and on exchange. Hall does not anticipate upcoming regulatory changes being a problem for the way the fund trades – although the requirement to post collateral against positions could increase costs. He said: “Increased margins could be an issue because the more margin we put up, the less cash we’ve got to put into interest-bearing liquid products.”
However, his main concern is whether he will be able to express a trade in its most profitable way and the importance of being able to outperform the benchmark.
He said: “We look at the fundamentals and the macro picture before we put the suggested positions through a technical analysis overlay, and then we look and see what the physical market is doing. The outcome of those factors will dictate the amount of risk we are willing to take.”