Commodities are hot, as are quant strategies. Allocations are pouring into commodity index funds, commodity trading advisors (CTAs) and commodity focused hedge funds.
“We are starting to see programs coming in that are commodity focused. More and more you are getting demand for commodity related products and it is being driven by customers,” says Sol Waksman, president of Barclay Hedge. “You turn on the nightly news and you hear them talking about crude oil. Whenever you have that kind of interest in the popular media it translates into investment interest,” he adds.
Barclay Hedge estimates that there was $219.7 billion under management with CTAs at the end of March, an increase of 27.3% from March 2007. That does not include money benchmarked to commodity indexes, which have grown to more than $185 billion based on conservative estimates.
It is not just the traditional commodity vehicles according to Waksman. “Equity based hedge funds are looking to buy energy producing stocks as well as stock from gold producers.”
Managers want to cash in on the commodity bull but have not abandoned the structured products that led to huge losses last summer. While you might suspect that subprime fallout would have led to an outflow of money from certain quant-based funds that have to rely on models to price illiquid securities, Waksman says that has not necessarily been the case.
“If anything you have just the opposite. You have managers going out to buy distressed mortgages because you have bargain basement prices. These things are changing hands. UBS raised $15 billion in March. AIG is looking to raise $20 billion,” he says.
The funds taking mortgaged backed securities off the hands of the punch drunk investment banks are finding bargains, which Waksman says “may turn out to be a smart investment.” With increased competition in the investment space, quant funds stand to do well. “There is an understanding that if you are attempting to find alpha in a very competitive environment, and there is a lot of money out there creating a competitive environment, one place to search for alpha is going out on the liquidity curve. You are not going to find a lot of alpha trading large cap equities,” he says.
Hot new CTAs
Futures is looking for the best new CTAs to profile in our annual feature. If you will have managed customer funds for at least one year as of the end of August and have less than $20 million under management, mail your disclosure document and audited track record to Daniel P. Collins, Futures Magazine, 222 S. Riverside Plaza, Suite 620, Chicago, IL 60606. E-mail: dcollins@futuresmag.com . Deadline: Friday, August 22, 2008.
