Buy and hold, maximum long. That has basically been the strategy for commodity hedge funds for the last couple of years; but it is fast losing its luster.
Crude oil, industrial metals and a range of agricultural commodities are down significantly from their peaks earlier this year. In some cases by up to 50% – as rising interest rates increase the likelihood of U.S. and global recession.
For all that hedge funds are supposed to be quick-thinking, nimble operators with the freedom and flexibility to go short as well as long. They are the smartest guys in the room, after all – the reality is rather different.
Many are trend-spotting momentum players, betting on an asset appreciating in value and running with it. This approach is not all that different from any conventional buy-and-hold, long-only fund.
Hedge fund industry data provider Preqin’s commodities strategies index rose 13.8% from January through May; more than four times the 3.0% rise in the benchmark macro index; and three times the macros strategies index rise of 4.5%.
Similarly, rival industry data provider HFR’s commodity index was up 12.1% in the first five months of the year. The main contributor to the (total) macro index’s 9.35% gain. Commodities is a constituent part of the broader macro index.
But almost all of that impressive performance – 10.57% of it – was accrued in the first quarter. The index lost 0.46% in May, its biggest monthly fall since November 2020.
Hedge funds have chased performance, chased commodities higher. They have absolutely crushed it. But this last move down has really shaken some funds,” he added.
LONG, LONG, LONG
Second-quarter and first-half performance figures will be released in early July. It is unlikely to fall that much in Q2, but the peak definitely seems to have passed.
Brent crude oil futures are down around 20% from their March high, and benchmark London Metal Exchange copper futures last week hit their lowest level since February 2021. Copper has lost around a quarter of its value since hitting a record high in March.
The Bloomberg agriculture index fell more than 7% last week, its biggest fall since 2011. Speculators active in Commodity Futures Trading Commission futures are waking up to the shift. Funds sold oil in the latest week at the fastest rate in 15 weeks as the prospect of a U.S. recession sooner rather than later continued to intensify.
Saxo Bank’s commodity analysts said on Monday that the total CFTC net long position across 24 commodity futures they track fell 5% to a 22-month low of 1.5 million lots in the last week. The biggest reductions were in WTI crude oil, natural gas, grains and sugar.
– Reuters.
