Revival in commodities market suggested by hedge funds

Hedge funds are starting to move back into the commodities market, with a recent uptick in energy prices being the key driver.

After an across-the-board desertion of the market during the sliding commodity prices last year, increasing numbers of hedge funds are once again interested in the investment sphere and are stepping up their exposure to energy markets such as oil.

Following a suggestion late last week by the International Energy Agency (IEA) showing that the oil price — which has fallen by 65 per cent since June of 2014 — could be stabilising, leading commodities indexes to rise.

Samantha Gleave, co-manager on the Liontrust GF European Strategic Equity Fund, told The Globe and Mail: “Family offices and institutional investors have started asking us about our positioning in commodities sectors, but mostly focusing on oil.”

Investors have begun once again boosting their allocations to those hedge funds that are focused on the commodities market, with the last few months revealing an overall rise in funds. Indeed, the allocation figures hit $1.22 billion in the first month of this year, which was by far the largest allocation made since summer of 201, data from eVestment showed.

A related survey from Barclays that was published last month revealed that fund allocations to hedge funds concentrated on the commodities sector look set to increase by five per cent over the course of this year alone. As a result of this predicted rise in interest, asset managers have been enticed to put positive bets on oil prices over the last few weeks, according to the US Commodity Futures Trading Commission. The commission confirmed that net long positions were 35 per cent higher than they have been in previous weeks.

Research from Preqin also showed that two new commodity funds launched in the first 60 days of this year, compared to 17 fund closures and just five openings over the course of last year.

Meanwhile, following the IEA report, the S&P Goldman Sachs Commodity index closed up 102 points at 2,170. This news was especially important following the hitting of a 26-year low for the index in the first month of this year. Further rises in this index look set to entice even more allocations back into the arena.

Aref Karim, the founder, chief executive officer and chief investment officer at Quality Capital Management, which has recently launched a new strategy that makes predictions about the price of industrial commodity futures, said: “Some investors are looking at this asset class more favourably now as undervalued, and hence reconsidering a dedicated exposure to commodities for the long term.”

Meanwhile, David Whitten, who manages the Henderson HF Global Natural Resources fund alongside Clive Landale and Darko Kuzmanovic, says that investors should jump in now to take advantage of big initial investment returns rather than holding on and waiting for a sustained recovery in natural resources and commodities.

“Natural resource equities and commodity prices are cyclical in nature and history suggests that resource equity turning points are often sudden and explosive events. Many investors wait for a sustained large recovery before investing. The danger of this approach is the risk of missing out on substantial initial investment returns,” Mr Whitten told CityWire.

Mr Whitten went on to say that “danger signs” including delays to projects, asset sales and dividend cuts proved that the certain commodities, such as mining and oil, were indeed approaching a recovery.

“Distress creates opportunities and the eventual supply/demand balance rebound may be brought forward faster. Companies with sustainable natural resource advantages combined with prudent balance sheets can expect to take advantage of acquiring cheap assets,” Mr Whitten went on to say.

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