Hedge funds reap windfall by betting on specialist commodity markets

Hedge funds updates

Hedge funds that expanded into UK natural gas and German electricity have made big gains this year from the European energy crisis and sharp moves in specialist commodity markets, with one fund soaring more than two-fifths.

Man Group and Leda Braga’s Systemica Investments are among the firms whose top-performing portfolios have been well placed to profit from soaring gas prices in recent months, sparked by supply shortage fears. Natural gas prices in the UK alone have rocketed from just under 60 pence per therm at the end of April to more than 180 pence this month.

“The European power complex is one of the strongest trends I’ve seen in years, and I don’t even know if it’s over,” said Doug Greenig, a former chief risk officer at Man Group’s AHL unit who now runs London-based hedge fund Florin Court Capital.

His fund is up almost 20 per cent this year, according to a person who had seen the numbers, having profited from big moves in European electricity and gas markets as well as other markets as diverse as shipping and urea.

That performance marks the fund’s best year since Greenig overhauled it in 2017 to focus on niche areas such as cryptocurrencies and Chinese peanut kernels rather than more traditional sectors.

Most hedge funds in the so-called managed futures sector use algorithms to try to latch on to trends in mainstream bond, currency, stock and commodity futures. But the sector has swelled in size from $30bn two decades ago to more than $300bn today, according to data provider HFR.

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In turn, that growth has led some managers including Florin Court to seek less crowded markets which are more likely to be driven by fundamental supply and demand in their industries.

Beyond gas prices, changing dynamics in other markets have also benefited commodity investors who have focused on less popular markets. While lumber and iron ore soared in the first half of the year, driven by supply chain bottlenecks and surging global demand as economies reopened, they have since dropped sharply. Funds have been able to profit from both the rise and fall in prices.

Another big hedge fund winner this year is Gresham Investment Management. Its ACAR fund, which trades around 100 alternative commodity markets, is up around 43 per cent, having profited from moves in European electricity and carbon credit markets, as well as coke, coking coal and iron ore in China.

“This year is fairly exceptional in terms of the strength, consistency and duration of trends” said Scott Kerson, head of systematic strategies at Gresham.

“We want to be invested in markets where underlying production and consumption decisions drive the price,” Kerson added. “We don’t want to be invested in an arms race” with other quant funds, he added, referring to his decision to be invested in smaller markets.

Man Group’s AHL unit, one of the early pioneers of quant investing in specialist markets, has also performed well. Its $4.6bn Evolution fund is up around 15 per cent this year. Its smaller Evolution Frontier fund, which trades assets such as milk, butter and African currencies, has gained around 35 per cent, according to numbers sent to investors.

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Meanwhile, Systematica’s $4.8bn Alternative Markets fund is up 22.7 per cent, said a person who had seen the numbers, with gains also coming from EU carbon credits and Chinese iron ore. Aspect’s Alternative Markets fund has gained 20 per cent, and has also profited from commodities such as German electricity and lumber. 

Betting on less actively traded markets can be costly and complicated, particularly in relation to shipping.

However, charter rates have soared with surging commodity prices and rebounding economies. That has helped funds such as Paralos Asset Management, a shipping specialist, up more than 60 per cent this year.

“There are supply chain changes, and the world in general is moving to some new equilibrium,” said Florin Court’s Greenig, pointing to “amazing” trends in charter prices on routes such as from the Middle East to China.

“Shipping has been crazy,” he said.




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