Investors Rush To Commodities Hedge Funds


The hedge fund industry just can’t seem to catch a break this year. Performance is abysmal and in today’s world of low-cost ETFs and tracker funds, the hedge fund industry’s antiquated 2/20 fee structure is attracting plenty of negative publicity.

The combination of high costs and low returns isn’t doing the sector’s reputation any good and investors are withdrawing their cash from funds in droves.  Indeed, Tony James, president of private-equity giant Blackstone, told Bloomberg this week that he expects one-quarter of all current assets in hedge funds to be yanked out in the next year.

However, there’s one section of the hedge fund world that seems to be doing better than others.

After years of haemorrhaging clients and cash, commodities hedge funds now appear to be back in vogue.

According to Bloomberg, around $5 billion has flowed into commodities hedge funds so far this year. In fact, the first quarter of 2016 saw the biggest inflows into commodity-focused funds since 2009.

Figures from eVestment show that 290 commodities-focused hedge funds managed $70.5 billion at the end of March, up from a near six-year low of $65.4 billion at the end of last year but still far below the industry’s five-year peak of $85 billion in AUM printed at the end of 2012. Average returns were 6% in the first four months of the year, after a loss of 10.4% last year.

commodities hedge funds
Commodity hedge funds

It seems that the recent gains in oil are behind this sudden spark in commodity fund interest.

Commodities hedge funds: New breed

Commodity money managers suffered outflows totalling $6.2 billion from 2012 through 2014, and these outflows forced many commodities hedge funds to close their doors for good. But now a number of new commodities hedge funds are looking for investors. Bloomberg gives the example of former Brevan Howard and Moore Capital money manager Luke Sadrian, who is preparing to open a commodities fund in London in the second half of 2016.

Meanwhile, Schroders started a fund with its own cash last month to bet on the energy, agriculture and metal sectors. And the firm is currently raising capital from investors to complement its existing offering.

These new entrants to the commodities hedge funds space may find it hard to succeed than anticipated. Indeed, there are now many funds operating in this asset class and most of them are extremely volatile.

The collapse in commodity prices last year caught even the most experienced investors off guard with legendary oil trader Andy Hall’s commodities-focused hedge fund suffering a 35% loss in 2015. A quote published in Bloomberg’s weekly hedge fund brief from Michele Gesualdi, the London-based chief investment officer for hedge-fund investing at Kairos Partners, who oversees $2.5 billion and has just started reinvesting in commodity funds, sums up the sector’s cutthroat nature nicely:

“Funds that survived a significant fall in the oil price and in most commodities are clearly real hedge funds.”


SOURCE: Value Walk

MOVEMENT! Ground Shifts Under Wheat Export Market Record harvests, the strong dollar and cheap oil combine to shake up the multibillion-dollar global wheat market

Record harvests, the strong dollar and cheap oil combine to shake up the multibillion-dollar global wheat market

The global trade map in wheat is being redrawn by people like Greg Harvey.

For years, Singapore-based Mr. Harvey has used Australian wheat in the grain mills he manages throughout Southeast Asia. Last December, he turned to a different source: Argentina.

The transformation comes as record harvests, the strong dollar and cheap oil are combining to shake up the multibillion-dollar global wheat market. Bulging silos are pushing producers to seek new markets, and cheap oil is bringing down transportation costs. The surging greenback is undermining farmers in the U.S., the world’s second-largest exporter of the dollar-denominated commodity behind Canada, making grain from Russia to Argentina more competitive.

Meanwhile, French grain is turning up in Indonesia and Russian grain in Nigeria. On Thursday, a rare cargo of Argentine wheat arrived in Wilmington, N.C. The U.S. imports about four million tons of wheat a year, while it consumes more than 30 million tons, according to the U.S. Department of Agriculture.

This crop year, Russia is poised to become the world’s largest exporter. U.S. wheat exports are forecast to slump to a 44-year low, to 21.8 million metric tons, according to the USDA, while Canada is projected to export 20.5 million tons, from 24.1 million the year before. Russian exports are projected to rise 3%, to 23.5 million tons, according to the USDA.


“There is a lot of wheat out there, and it all comes down to price,” said Mr. Harvey, the chief executive of Singapore-based miller Interflour Group Pte.

The price of Chicago-traded wheat futures fell to five-year lows in December. On Friday, wheat for March delivery fell 6 cents, or 1.3%, to $4.6675 a bushel on the Chicago Board of Trade, up 3.2% from that Dec. 2 low.

As the price of wheat has fallen, the dollar—which rose in late January to its highest level against other major currencies in more than 13 years, according to the WSJ Dollar Index—is making U.S. wheat more expensive for buyers using other currencies.

“Unless emerging-market currencies stop falling, the U.S. will lose more export market share and will begin to see more foreign product coming in,” said Michael McDougall, director of agricultural commodities at Société Générale SA in New York.

Consumers appear to be benefiting from the cheaper wheat, which is used to make bread, pasta, as well as animal feed.

The United Nations Food and Agriculture Organization said on Thursday that the grain glut and increased competition helped push food prices to near seven-year lows in January.

Global stockpiles of wheat rose to 213 million tons in the 2015-2016 crop year, the highest level in data going back to 1960, according to the International Grains Council. Inventories are expected to dip only slightly to the second-highest level ever in the 2016-17 crop year, amid favorable harvest prospects, the council said.

The reshaping of trade routes has been greased by a 20-month slump in crude prices that has brought down freight costs. The Baltic Dry Index, which measures the price of moving raw materials by sea, hit its lowest level on record on Thursday. Last month, traders offered to ship wheat from France to Egypt for $7.59 a ton, compared with $13.75 a ton a year earlier.

The moves follow years of high prices, as demand from China and other emerging markets increased at a fast clip. But as with other commodities, from oil to copper, oversupply pushed wheat prices down and unleashed a battle for market share.

To be sure, the trade balance could shift again on the back of catastrophic harvests, a fall in the dollar and a rebound in oil. But few are predicting that in the short term.

Pushing to take the place of U.S. grain is Russia, whose currency, the ruble, touched its weakest-ever level against the dollar in mid-January.

With their crop so cheap, Russian wheat is pushing into places it hasn’t been in many years, if ever, while grabbing a larger share of established markets, such as Egypt. That includes markets traditionally dominated by the U.S., which was supplanted by Canada last year as the world’s biggest wheat exporter.

“This season we’re selling more to distant destinations like Nigeria…and we also supplied some wheat to Mexico,” said Andrey Sizov, managing director of Russian agriculture consulting firm SovEcon.

That is hurting U.S. farmers, contributing to the 38% fall in farm income that the USDA forecast happened last year.

The U.S. is also seeing renewed competition from Argentina. Last December, newly elected President Mauricio Macri lifted capital controls that allowed the peso to fall by nearly a third against the dollar in one day. He also eliminated a 23% export tariff on wheat.

Other Western producers are being hit hard.

During the last crop season, which runs from July to June, France supplied 40% of the wheat bought by Egypt, the world’s biggest wheat importer. This crop year, it took until November for France to sell its first cargo to Egypt.

That November sale was helped as the euro fell against other currencies. But any hope that French exporters had turned a corner was dashed in December, when Mr. Macri’s overhauls sent a wave of Argentine grain onto the world market.

“France should have won, but now Argentina was there, $5 cheaper,” said Gabriel Omnes, an analyst at French consulting firm Stratégie Grains.

It was around that time that Mr. Harvey of Interflour ordered his first Argentine cargo since 2009.

“We are looking for new suppliers all the time…and now we have so much to choose from,” he said.


SOURCE: Wall Street Journal

Is the worst now over for commodity prices?


The last couple of years have been truly horrific for investors in a number of resources companies. Profits have tumbled, share prices have plunged and investor sentiment towards mining and oil and gas companies in particular has weakened significantly.

However, in recent months the outlook for a number of commodities has improved dramatically. For example, since the turn of the year gold has risen by around 18% while the price of oil is now almost 80% higher than it was earlier in the year. For many investors, such figures may mean that commodities as a whole are worth investing in. But in reality, it depends on which commodity is being discussed. In other words, some commodities may perform well, while others see their prices come under pressure.

Black gold

One commodity with strong long term growth appeal is oil. Clearly, it has already risen dramatically in price in recent months, but there could be much more to come over the long run as the current supply/demand imbalance begins to change.

A key reason for that is a forecast increase in demand from the emerging world for oil. With industrialisation likely to continue and energy use across the developing world set to increase as incomes rise and car ownership and transport use increase, demand for oil is likely to do the same. And while cleaner forms of energy are becoming more prevalent in the developed world (in particular as technology improves at a rapid rate), fossil fuels such as oil are still forecast to be a major part of the energy mix in the coming decades.

Iron and steel

It’s a similar story for iron ore, since demand from the emerging world that will continue to industrialise is likely to rise for the steelmaking ingredient. However, the outlook for iron ore may be somewhat less appealing than is the case for oil, since the Chinese economy is gradually transitioning away from capital expenditure-led projects and towards a more consumer-led economy. This means that while demand for iron ore could rise in future, it may be constrained somewhat by moderating demand from China.

Safe haven?

Meanwhile, gold’s future is somewhat uncertain. On the one hand it could benefit from an uncertain economic outlook and continue to be popular among investors due to its status as a perceived safer asset. However, with interest rate rises on the horizon, gold’s appeal may be held back somewhat and if comments made by San Francisco Federal Reserve President John Williams are accurate, then a rate hike could take place imminently, with further rises in 2017. Such a situation could cause the price of gold to disappoint compared to its recent performance.

Clearly, the long-term outlook for oil, iron ore, gold and all other commodities is highly uncertain and there could be significant volatility in the short-to-medium term. As such, it seems sensible for investors to diversity and pick out companies that offer a wide margin of safety and have significant financial resources.

Of course, finding the best commodity stocks at the lowest prices can be challenging when work and other commitments get in the way.

That’s why the analysts at The Motley Fool have written a free and without obligation guide called 10 Steps To Making A Million In The Market.

It’s a step-by-step guide that could make a real difference to your financial future and allow you to retire early, pay off your mortgage, or even build a seven-figure portfolio.


SOURCE: Motley Fool

STUNTED GROWTH? GRAINS – Markets retreat as U.S. dollar extends rally

* Corn snaps five-session rally, fails to hold above $4

* Soybeans, wheat also trade lower

* U.S. dollar index at near two-month high

U.S. grain and soy futures dipped on Thursday as gains in the dollar prompted investors to take profits after recent rallies. Nearby soybeans retreated after climbing on Wednesday to levels not seen for a front-month contract since September 2014, while nearby corn fell a day after touching its second-highest level since July. Soybeans “are beginning to look a bit tired,” said Tomm Pfitzenmaier, analyst for Summit Commodity Brokerage in Iowa. And “corn is becoming a bit overbought,” he said.

The nearby and most-active corn contract on the Chicago Board Of Trade fell 2.6 percent to $3.89 a bushel by 1530 GMT. Wheat lost 2.7 percent to $4.67 a bushel, and soybeans gave up 1.1 percent to $10.63-1/4 a bushel. The stronger U.S. dollar makes commodities, traded on a dollar basis, more expensive for buyers holding other currencies. The dollar index, measured against a basket of currencies, hit a near two-month high, furthering its gains from the previous session.

Outside investors, who have helped push up grain prices with recent buying, will be sidelined until the dollar rally abates, said Rich Feltes, analyst for broker RJ O’Brien. Also, global grain supplies are large, adding pressure on prices. “Wheat bears continue to talk about a glut of cheap feed wheat and how both global and domestic supplies are ridiculously large,” said Kevin Van Trump, chief executive of Missouri agricultural consultancy Farm Direction. The U.S. Department of Agriculture on Thursday reported export sales of U.S. wheat in the latest week at 175,200 tonnes for 2015/16, in line with trade expectations, and 573,500 tonnes for 2016/17, above expectations. Export sales of corn and soy also met or exceeded analysts’ estimates.

SMILE! Investor sentiment on commodities turns positive: Lloyds


Investor sentiment on commodities has turned positive for the first time in six months, according to Lloyds Bank’s latest index.

Commodities have seen the greatest monthly increase in confidence, while gold and UK property remain popular.

Overall, investor confidence has risen slightly since last month’s record low, reflecting in part an improvement in the actual market performance of all but two asset classes, according to the index.

Ongoing nervousness in markets has contributed to a continued cautious response from investors on the whole, however.

Volatile investor attitides to emerging market equities has also continued, with this month seeing a positive swing of 4.39 per cent, potentially showing a more short term preference for this asset class.

Despite an improved picture, investor sentiment is more negative towards the more unfamiliar and riskier asset classes, regardless of their performance, accrording to the Lloyds index.

Lloyds’ index showed investors seem to have little confidence in UK government bonds and UK corporate bonds at the moment, whilst Eurozone and Japanese equities have the lowest confidence ratings across the board.

Alongside this, US equities have also now crept into negative territory.

Markus Stadlmann, chief investment officer at Lloyds Private Banking, said investor sentiment has become more positive for most asset classes, albeit from a low base.

“There are growing reservations about investing more money in equities, with the exception of emerging markets. UK gilt and corporate bond sentiment has fallen considerably, which probably reflects concerns about whether they can deliver positive returns in the future.

“Although they remain popular with investors, the safe haven assets of gold and domestic property have both seen a slight fall in sentiment over the last few weeks.”

He added that while commodities and emerging markets have both seen improvements in sentiment, this perhaps just a reflection that UK investors think both of these asset classes are over the worst.


SOURCE: Ruth Gillbe –

FANCY TRYING SOMETHING NEW? A Beginner’s Guide To Hedging


Although it sounds like your neighbor’s hobby who’s obsessed with his topiary garden full of tall bushes shaped like giraffes and dinosaurs, hedging is a practice every investor should know about. There is no arguing that portfolio protection is often just as important as portfolio appreciation. Like your neighbor’s obsession, however, hedging is talked about more than it is explained, making it seem as though it belongs only to the most esoteric financial realms. Well, even if you are a beginner, you can learn what hedging is, how it works and what hedging techniques investors and companies use to protect themselves.

What Is Hedging?
The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn’t prevent a negative event from happening, but if it does happen and you’re properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday. For example, if you buy house insurance, you are hedging yourself against fires, break-ins or other unforeseen disasters.

Portfolio managers, individual investors and corporations use hedging techniques to reduce their exposure to various risks. In financial markets, however, hedging becomes more complicated than simply paying an insurance company a fee every year. Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another.

Technically, to hedge you would invest in two securities with negative correlations. Of course, nothing in this world is free, so you still have to pay for this type of insurance in one form or another.

Although some of us may fantasize about a world where profit potentials are limitless but also risk free, hedging can’t help us escape the hard reality of the risk-return tradeoff. A reduction in risk will always mean a reduction in potential profits. So, hedging, for the most part, is a technique not by which you will make money but by which you can reduce potential loss. If the investment you are hedging against makes money, you will have typically reduced the profit that you could have made, and if the investment loses money, your hedge, if successful, will reduce that loss.

How Do Investors Hedge?
Hedging techniques generally involve the use of complicated financial instruments known as derivatives, the two most common of which are options and futures. We’re not going to get into the nitty-gritty of describing how these instruments work, but for now just keep in mind that with these instruments you can develop trading strategies where a loss in one investment is offset by a gain in a derivative.

Let’s see how this works with an example. Say you own shares of Cory’s Tequila Corporation (Ticker: CTC). Although you believe in this company for the long run, you are a little worried about some short-term losses in the tequila industry. To protect yourself from a fall in CTC you can buy a put option (a derivative) on the company, which gives you the right to sell CTC at a specific price (strike price). This strategy is known as a married put. If your stock price tumbles below the strike price, these losses will be offset by gains in the put option.

The other classic hedging example involves a company that depends on a certain commodity. Let’s say Cory’s Tequila Corporation is worried about the volatility in the price of agave, the plant used to make tequila. The company would be in deep trouble if the price of agave were to skyrocket, which would severely eat into profit margins. To protect (hedge) against the uncertainty of agave prices, CTC can enter into a futures contract (or its less regulated cousin, the forward contract), which allows the company to buy the agave at a specific price at a set date in the future. Now CTC can budget without worrying about the fluctuating commodity.

If the agave skyrockets above that price specified by the futures contract, the hedge will have paid off because CTC will save money by paying the lower price. However, if the price goes down, CTC is still obligated to pay the price in the contract and actually would have been better off not hedging.

Keep in mind that because there are so many different types of options and futures contracts an investor can hedge against nearly anything, whether a stock, commodity price, interest rate and currency – investors can even hedge against the weather.

The Downside
Every hedge has a cost, so before you decide to use hedging, you must ask yourself if the benefits received from it justify the expense. Remember, the goal of hedging isn’t to make money but to protect from losses. The cost of the hedge – whether it is the cost of an option or lost profits from being on the wrong side of a futures contract – cannot be avoided. This is the price you have to pay to avoid uncertainty.

We’ve been comparing hedging versus insurance, but we should emphasize that insurance is far more precise than hedging. With insurance, you are completely compensated for your loss (usually minus a deductible). Hedging a portfolio isn’t a perfect science and things can go wrong. Although risk managers are always aiming for the perfect hedge, it is difficult to achieve in practice.

What Hedging Means to You
The majority of investors will never trade a derivative contract in their life. In fact most buy-and-hold investors ignore short-term fluctuation altogether. For these investors there is little point in engaging in hedging because they let their investments grow with the overall market. So why learn about hedging?

Even if you never hedge for your own portfolio you should understand how it works because many big companies and investment funds will hedge in some form. Oil companies, for example, might hedge against the price of oil while an international mutual fund might hedge against fluctuations in foreign exchange rates. An understanding of hedging will help you to comprehend and analyze these investments.

Risk is an essential yet precarious element of investing. Regardless of what kind of investor one aims to be, having a basic knowledge of hedging strategies will lead to better awareness of how investors and companies work to protect themselves. Whether or not you decide to start practicing the intricate uses of derivatives, learning about how hedging works will help advance your understanding of the market, which will always help you be a better investor.



POP! China Commodity Bubble Bursts As Exchanges Curb Goldman’s “Biggest Concern”


After a brutal run in January through to mid-February, on the surface of it the FTSE 100 index has recovered lost ground, climbing this week above 6300 points having started the year at 6242. So does this mean the January wobble and endless Brexit navel-gazing has all been a storm in a teacup?

When you scratch beneath the surface of the headline level of the FTSE 100 however, it becomes all too clear just how narrowly-based the market fight back has been. Stripping out its exposure to the commodity sectors, the FTSE 100 has yet to catch up with the where it started the year.

The enormity of the bounce in commodity stocks has caught most fund managers by surprise, including some of the very best names in the business, with most actively-managed UK equity funds having underperformed over the quarter. That’s because many managers have been underweighting or ignoring these sectors on fundamental reasons. Worse off still are some long/short funds, which have been wrongfooted by having short positions on commodities and emerging markets.

So what on earth is going on? There are a number of factors which may explain the rally in commodities. These include more dovish statements from the US Federal Reserve which has seen expectations of a normal US rate hiking cycle evaporate, leading to a softening of the US dollar and relieving pressure on emerging markets but also commodities.

Alongside this has been a further monetary expansion in China to stimulate economic activity, but which have also seen China’s debt to GDP ratio test new levels that will renew concerns about the fragility of its financial system.

And in the case of oil, there were also pent up hopes that a deal would be reached in Doha to limited production – a deal which was ultimately quashed by the Saudis refusing to agree without their arch-foe Iran also coming to the table.

Also at work are likely to be some technical factors. Many hedge funds with short positions on commodities will have been scrabbling to unwind these in the face of rising share prices. That’s likely to have had the effect of boosting prices as squeezed funds have stampeded for the exit.

But another factor, covered in a fascinating blog by Woodford Investment Management entitled ‘Bubble Trouble’ is that Chinese private investors have been trading vast volumes of futures on the Dalian Commodities Exchange, so we could be seeing another manifestation of the speculative bubble that was lanced in the Chinese equity market at the start of the year.

The question investors face is whether this rally in commodities is warranted and sustainable, or if it is a dead cat bounce fuelled by speculative behaviour and technical factors?

In the case of oil, despite the failure to achieve an agreement to limit supply in Doha, there is a gradual rebalancing of supply and demand going on as the Saudi strategy of defending market share by strangling the US shale industry proves effective.

Fracking firms are continuing to go bust in the US at rapid pace. According to Guinness Asset Management, US oil directed rig counts have slumped to 329, down from a peak of 1609. But the road ahead for the oil price could yet remain volatile, as Iran and Libya are a long way under their potential productive capacity and, importantly, oil is a weapon of policy in the region so future moves can be highly unpredictable.

Even with a process of rebalancing, the price of oil may eventually stabilise at at level that remain substantially below where it traded at a couple of years ago, as the Saudi break-even point is well below that of Iran.

The strength of the broader rally in raw materials and industrial metals looks overdone given the anaemic outlook for global growth and overcapacity in supply.

So even if the bear market for commodities has finally run its course investors should be very careful about jumping enthusiastically on the commodities bandwagon at this stage.


SOURCE: Jason Hollands –

Jason Hollands is managing director at Tilney Bestinvest