Perspectives on Commodities and Managed Futures Investing
A benefit of being a BHA research analyst is hearing the countless views and opinions of hedge fund, private equity, and real estate investors. From call to call and day to day, BHA analysts hear a wide variety of interpretations of alternative strategies. An area that generates a lot of debate is commodities and managed futures investing. Many investors have a preference for how these managers approach their trading day
The BHA Quarterly Research Report | Q1 2010 noted a recent rise in investor interest in the high-frequency, algorithmic trading strategies that are often associated with commodities and managed futures funds. Trading-oriented investors are conducting more research of these sophisticated—and at times controversial—short-term trading operations.
Although these high-frequency trading programs have attracted many investors, there are still many that prefer near to longer-term, discretionary strategies. And for every manager that seeks market momentum and quick gains, there are many others that remain focused on steady, long-term growth.
This past week, a BHA analyst spoke with a portfolio manager overseeing research and fund selection at a wealth advisory firm. He was searching for commodities and managed futures funds, preferably funds of funds. The firm is focused on true discretionary managers that have longer-term holding periods. It knows that very short-term, systematic and algorithmic funds are an attractive and new niche. However, it also finds that it is difficult to understand the many facets of high-frequency trading and interpret them for clients.
Many investors also want the ability to speak with a portfolio manager who is able to clearly articulate why he or she decided to buy or sell a certain commodity or futures contract at a certain time. This is preferable to being told that such decisions are incorporated into an efficient and automated trading model. They want old-school traders that use their own market knowledge and experience to make trading decisions rather than a systematic or black-box trading model.
The portfolio manager who spoke with a BHA analyst last week recognized that many of these algorithmic trading platforms are able to prove their worth at times with high, attractive returns. However, he also stated that there are times when such models can hurt a portfolio because they don’t have the ability or foresight to change their view or position on the market as a whole.
Many who fall in line with this opinion point to the drop in performance among many systematic commodities and managed futures funds from 2008 and 2009. During 2008, short-term trading commodities and managed futures funds were able to outperform the vast majority of other hedge funds and caught the attention of many investors. However, this was followed by very mediocre performance at best during 2009, when many shorter-term commodities and managed futures managers struggled to profit.
Although there are many investors that pursue commodities and managed futures traders to add volatility and great short-term returns to a portfolio, these funds can serve a different purpose. Many investors incorporate this asset class into a portfolio that is designed for long-term growth and preservation of capital over a span of quarters and years as opposed to days and weeks.