From the March 2014 issue of Futures Magazine • Subscribe!

Finding winners in a risk on/risk off world

Physical commodities rule 

Short-term, discretionary and agricultural market-centered managers did well. The Barclay Agricultural Traders Index earned 2.89% for 2013 and two of our top traders of the year are ag focused: Tlaloc Capital and Four Seasons Commodities Corp. Tlaloc combines all those elements with a disciplined approach to produce solid risk-adjusted-returns. 

Albert Hu, head trader for Diamond Capital Management, says the difficult environment is not just about risk on/risk off due to government intervention but the fact that central banks are acting more in concert with each other. “With all this globalization the major central banks have adopted the same kind of strategies,” Hu says. “The world economy has become much more integrated. In order to make money in the currencies you have to have very different central bank policies; now all central banks have the same policy.”

He adds that the same holds true with global fixed income markets. 

Four Seasons Founder Steve DeCook says politics is a growing fundamental factor. “The Chinese have been a huge buyer of beans and now the whole world is waiting to see if they are they going to continue to buy our beans and pay $1 per bushel more or are they going to switch their sales to South America.” 

The Chinese have been known to cancel large orders but the takeaway here is that this type of factor that could disrupt normal trends in the market and be extremely difficult for a systematic manager to react to. 

This gives an edge to programs concentrating on physical commodities and using discretion. “Tangible commodities such as corn, wheat and sugar behave differently and in a more predictable manner than financial markets,” says Rollinger who launched a commodity-focused long/short program this year. “Fundamentals appear to play out more normally in physical commodities markets. Supply, demand, weather, etc. oftentimes create short-term, directional volatility bursts that our strategy is designed to capture.”

And people are voting with their wallets. Tlaloc launched in 2011 and is currently managing more than $58 million trading the corn market. Four Seasons reached the $90 million mark in 2013. 

These are large allocations for ag-focused managers. DeCook’s partner, Malinda Goldsmith says they are getting allocations from institutions, many offshore, looking specifically for commodity traders. 

DeCook adds, “A certain number of people want a fundamental agricultural trader and there aren’t a lot of choices if that is what you want.”

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