While European and U.S. money managers are expanding their commodities businesses, investors interested in long-only strategies could have a tough search ahead.
High-quality commodities managers are hard to find, especially active long-only ones, because there aren't that many people who have done commodities trading, consultants and hedge fund-of-funds managers say.
Some consultants count fewer than a dozen active discretionary commodities strategies they recommend to clients, and growth of commodity trading hedge fund strategies is also limited by the number of experienced traders.
Also, active and hedge fund commodity strategies can have fairly low capacity constraints, depending on which commodities they focus on, and might have to close to new business. That further cuts the number of opportunities to investors.
“It is an emerging sector and we have to remember that there are few enough players who have real depth and a long history of investing in commodities,” said Aoifinn Devitt, principal at alternatives consultant Clontarf Capital, London.
Plus, managers who are new to the strategies have a difficult time because of their background in equity and fixed-income management, said David Mooney, co-head of investment and commodities portfolio manager at NewFinance Capital LLP, London. NewFinance runs £1.6 billion ($2.4 billion) in institutional hedge fund-of-fund commodity assets.
“It doesn't come naturally to most commodity traders to go long-only,” said Mr. Mooney. “You can't rebrand yourself and say, "Last week I was trading government bonds and now I'm trading oil futures.' Such a manager would lack any credibility.”
Since Jan. 1, new commodities strategies have been launched by: Hermes Fund Managers Ltd., Threadneedle Asset Management Ltd. and Duet Asset Management., all of London; as well as Informed Portfolio Management AB, Stockholm; and Anchor Point Capital LLC, Coral Gables, Fla.
The dearth of high-quality competitors leads officials at Hermes to believe they will attract assets quickly in their three commodities strategies — index, index-plus and alpha. The strategies, developed years ago for Hermes' owner and biggest client, the £34.1 billion BT Pension Scheme, London, have been offered to third-party institutional investors starting this year.
In March, Hermes and Deutsche Bank launched enhanced beta and absolute return commodities offerings aimed at institutional investors.
Hermes, which had £1.7 billion in commodities as of March 31, rolled out its first strategy, an index approach, in 2005.
Index strategies were the first port of call for many institutional investors dipping into commodities; however, they're largely being abandoned for active and hedge fund strategies now, experts say.Institutional investors that began using indexed strategies in commodities have largely abandoned them for active and hedge fund and fund-of-fund strategies. Most investors new to commodities are skipping over index strategies entirely, the experts add.
Passive players used to creating stock and bond index funds have found commodity index strategies aren't as simple to run, said Jason Lejonvarn, director, commodities, at Hermes. “What they've found is that the infrastructure, the tools and even the concepts are not the same as with passive equities, for example.”
Index strategies are actually far from being passive, with the entire portfolio turned over every month.