Hedge Funds Eye Commodities


2011 has proven a mixed year for hedge funds as some strategies struggle whilst others flourish.

Global macro has proven to be one of the most successful strategies, with some major hedge funds posting double digit year-to-date returns. Long/short, merger arbitrage and other strategies have had mixed results.

But one thing is a sure thing: investors want exposure to commodities.

Research from TrimTabs last week indicated that hedge funds saw large inflows during August. That was the beginning of market pessimism that has infatuated investors. Since commodities are commonly seen as a hedge against equity markets due to their (typical) inverse correlations, CTA and commodity hedge funds are enjoying the investor rush to commodities, with TrimTabs calling them “wildly enthusiastic.”

“CTAs raked in $8.1 billion in August, the heaviest inflow since June 2009. They have also posted only one outflow in 18 months and have hauled in $66.8 billion since the start of 2010,” the report from TrimTabs noted.

And investors aren’t the only ones jumping on the commodities bandwagon. Former proprietary traders for bulge bracket banks that have since left due to the implementation of the Volcker Rule have gone off to start their own hedge funds. Damien Bombell, a former commodities trader at JP Morgan, is said to be starting his own global macro commodities fund that will trade physicals including coffee, metals and grains.

Even before the Volcker Rule and Dodd-Frank, commodities traders were leaving major firms to start their own commodity-focused hedge funds, including former Citigroup trader Andrew Hall and Enron energy trader John Arnold, who went on to form Cerberus Capital Management.

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