The Eurekahedge Commodity Hedge Fund Index is an equal-weighted index which tracks the performance of underlying hedge fund managers who invest exclusively into commodities and commodities-related instruments. Historical returns for the index along with constituent details can be accessed here.
In our analysis, the Eurekahedge Commodity Hedge Fund Index was up 0.77% in July (9.19% July year-to-date) in what turned out to be a good month for managers allocating to precious metals, energy and softs. Underlying managers reported impressive gains made from the rally in precious metals in July as gold climbed during the latter half of the month, on the back of a weakening greenback and lacklustre GDP figures coming from the US. Short positions in crude oil proved to be profitable as concerns of a saturated market once again crept into investors’ outlook, leading oil markets lower during the month. Agricultural commodities ended the month lower, with the S&P GSCI Softs down 7.54%. Managers made strong gains from cotton futures partly due to improved demand outlook from Asia making it the best performer within the agricultural space this month.
Commodities as a whole are likely to trend lower against the backdrop of anaemic global demand and supply side challenges particularly in the energy markets. Following a recovery in energy prices in the second quarter of the year, thanks in part due to reduced non-OPEC oil production and supply side disruptions, concerns are abound again over the prospects of OPEC members agreeing on a production cut to provide some support to oil prices. The OPEC camp remains divided, and while the Saudis may be itching for a cut in production given their economy's overwhelming reliance on oil revenues, the Iranians and Russians will be in no mood to comply. Further complicating these discussions is the geopolitics of the region as Russia/Iran and Saudi Arabia/Gulf allies take opposing sides in the conflict in Syria. Given weak global demand, a failure on part of OPEC to reach any compromise on reducing oil inventories is likely to put sustained downward pressure on energy prices. This in turn is likely to draw prices for energy intensive agriculture and softs lower as well barring any supply side disruptions due to unfavourable weather conditions or government intervention in the form of price supports or subsidies to farmers.
The outlook for metals also looks bleak and weaknesses in industrial demand along with a slow-down in China’s property market and the wider economy could put further downward pressure on metal prices. Precious metals could be the wild card in the pool of commodities. Brexit saw a rush towards safe haven assets and brought assets like gold back into the limelight. Markets have since calmed down, but the prospects of further monetary easing in the EU and Japan coupled with delayed policy normalisation in the US (perhaps no rate hike till early-2017) continue to cast doubt on the efficacy of central bank monetary activism in reviving growth. Add to this talk of ‘helicopter money’ and a declining velocity of circulation for money; lethargic growth in the global economy could erode confidence very seriously in the power of fiat currency which could see a drive towards real assets.
On a year-to-date basis, commodity hedge funds are up an impressive 9.19%, ahead of gains posted by the equal-weighted Dow Jones Commodity Index, which is up 7.41% and the Eurekahedge 50 Index – an annually rebalanced diversified portfolio of 50 large USD denominated hedge funds – which is up 1.51% for the year. On a three year annualised basis, the Eurekahedge Commodity Hedge Fund Index is up 2.18% compared with a 3.10% gain for the Eurekahedge 50 index. Commodity investing managers have also realised gains at a lower three year annualised volatility level compared to underlying commodity market indices as represented in Table 1. The three year annualised volatility for the equal-weighted Dow Jones Commodity Index was roughly three times that for commodity investing hedge fund managers, with the three year annualised volatility level for the latter coming in at 4.48% compared to 14.40% for the Dow Jones Commodity Index.
Trading mostly in liquid commodity products, it is unsurprising that close to 30% of the constituents of the Eurekahedge Commodity Hedge Fund Index offer daily liquidity, and with a year-to-date returns outperforming that of the Eurekahedge Hedge Fund Index, the strategy could be an attractive one for investors seeking liquidity as well as uncorrelated returns to the overall market.
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