Interview
with Gregory Smith, CIO of Global Commodities
Ltd
Eurekahedge
November 2005
Gregory Smith has over 25 years' experience
in the commodities markets as a fund manager,
senior trader and founder/co-founder of
two CTA funds, as well as the Enhanced Commodity
Index (ECI) Fund for Asian and European
investors.
Global Commodities Ltd is an Australia-based
hedge fund that uses a quant-based investment
model developed and applied in the commodity
futures markets for over 15 years. The firm
has offices in Australia and Singapore,
and offers private managed accounts for
retail investors and a Cayman-domiciled
fund, ECI, for wholesale investors. The
portfolio weightings are 42%, 21%, 19% and
18% for Energies, Metals, Grains and Agriculturals
respectively. The investment objective is
to outperform a benchmark constituting the
CRB index and GSCI with equal weighting,
and to have lower portfolio volatility than
global equities. ECI is offered in USD,
EUR and AUD share classes.
From a review of ECI's performance
graph, in the past, it can be noticed
that the spikes were more prominent and
the troughs less deep as compared to the
CRB/GSCI benchmark.
Initially the reference benchmark was
the CRB index. In March 2001, it was
decided to modify the reference benchmark
so as to more accurately represent the
ECI portfolio.
To do this, 50% of the CRB was substituted
for the GSCI. Thus a blend of two indices
became the reference benchmark.
References to the ECI historical performance
between December 1999 and November 2004
are to Commodity Strategies Ltd (CSL),
utilising its commodity index enhancement
methodology. I was a director of and
equal shareholder in CSL during this
period. At Global Commodities, we continue
to utilise and improve the commodity
risk management methodology.
But since late 2003, they have been
pretty strongly correlated. What would
you attribute this to?
It's basically been one-way traffic
since mid 2003, meaning we have seen
a sharp escalation in most commodity
values. In such bull moves, we keep
up but will not outperform our reference
benchmark.
Performance to date has shown a capture
of approximately 85% of positive moves
in the reference benchmark.
How large is your fund now and
what % of the assets under GCL's management
is distributed among private managed
accounts and ECI?
The fund now has over US$40 million
and we have no managed accounts as yet.
We offer them but most investors are
comfortable with the ECI Fund. We offer
three classes of shares US dollar, Euro
and Australian dollar.
If you were to summarise your investment
strategy in terms of one unique selling
proposition, what would that be? Why?
We offer efficient, liquid, low cost
collateralised commodity investment
with low fees and an active risk management
overlay.
What makes us unique is we revert to
fixed interest when commodities are
a cost to store. The cost of storage
and its associated risk can reduce returns
and increase volatility. We try and
stay out of those commodity markets
that are a cost to store in our portfolio.
There are 3 or 4 other players in
this area, including Goldman Sachs,
with about US$30 billion invested in
the passive commodity indices strategy.
How does an index fund like yours differentiate
itself?
We utilise an index structure (unleveraged)
but reduce commodity exposure during
times of increasing storage costs. We
offer an efficient, low cost collateralised
commodity investment with a risk management
overlay that over time delivers less
volatility than shares with a similar
return expectation.
Who do you feel are your main competitors?
Global Commodities is a niche manager
and sits between passive commodity indices
and CTAs.
How is a benchmark-outperforming
strategy with a risk management overlay
better for returns than a risk-neutralising
absolute return strategy?
We are not an absolute return strategy.
We are a risk manager focusing on capital
preservation while allowing the underlying
asset class (commodities) to generate
the returns. We outperform the reference
benchmark over time by losing less when
it is determined that commodities are
a cost to store.
Could you elaborate on the 'low
management fee and no performance fee'
aspect of ECI?
We wanted to offer a robust alternative
to passive indices with the benefit
of active risk management with low fees.
Performance fees are inappropriate as
they actually reduce commodity exposure
to the reference benchmark during times
of high storage costs.
Does this make it more attractive
to investors?
Yes… as investors are paying fewer
fees.
Also, does this mean that more of
the manager's capital is at risk?
You could look at it that way…
as our investors are happy to pay a
low management fee (compared to CTAs
and hedge funds) and they understand
the better we preserve capital, the
more we earn over time.
It says in your investment mandate
that the strategy is not to target market
inefficiency but to capitalise on how
commodities are stored, transacted and
valued. How frequent are instances of
a happy congruence of both?
Rarely… as the commodity markets
are very efficient.
Are such instances actively pursued?
No… our strategy is identifying
costs associated with storing commodities
and managing the risk.
Do you factor in the location of
an investment opportunity in your asset
allocation decision? If yes, could you
give us a breakdown of the fund's assets
by investment region and/or the respective
share of each region?
No… we factor in supply demand
and seasonality's among others but not
locality.
How many markets do you trade in
globally?
22 markets across 4 sectors (fossil
fuels, metals, grains and tropicals
[sugar, coffee, etc]).
A look at the numbers in the Eurekahedge
database shows that the number of funds
located in Asia using the managed futures
strategy, is far lower in comparison
to the number of funds operating in
Europe or the US. Does being one of
the few such funds give you an edge
in terms of access to investors?
Not really… it's a global market
place after all. However, Asian investors
are becoming more aware of their regions
demand for commodities and the benefits
associated with this asset class.
Are there any other merits to being
located in Asia?
Being licensed in Australia gives investors
added comfort from a regulatory perspective
as it is very comprehensive when compared
to other jurisdictions in alternate
financial regions.
What is your outlook for the growth,
in number as well as in size, of CTA funds
in the region as well as globally?
Growth will continue as more investors
want and gain commodity exposure. Increasing
investment in this asset class will
be driven by the low correlation to
shares and hedge funds, commodities
are a real asset, they are supply/demand-driven
(not net present value of future earnings).
And without commodities we do not have
a functioning society… reckon we
save this discussion for a later article.
What are the implications of the
same for your fund's future performance?
As more funds invest in this asset
class, we expect larger price ranges
and more abrupt moves in market structure
(from contango to backwardation). During
these types of market conditions, it
is prudent to apply risk management
strategies. Our objective is to manage
the downside risk effectively and offer
a superior risk-adjusted investment
compared to our reference benchmarks
over any 3-year period.
