As we’ve seen regularly in the hedge fund industry, if you are not posting exceptional results, your clients are probably taking their money elsewhere. The most recent hedge fund segment to fall victim to this reality has been commodity funds. In 2012, this high volatility segment posted its worst annual performance in over a decade. As a result, according to the Financial Times, commodity hedge funds lost 20 percent of their total assets under management in 2012.
Lackluster Returns Force Investors to the Exits
On average, commodity funds lost 3.7 percent in 2012, according to data prepared by Newedge and provided to the Financial Times. This represents a second year of poor performance, following 2011’s 1.4 percent loss. While on the surface these losses may look far from attractive from an investor point of view, commodity funds have posted fairly strong results over the few years leading up to the recent declines. This is not to underemphasize the current level of performance though; the most recent loss is the worst the segment has faced since the implementation of the index.
As investors in several poorly performing funds head to the exits, Fabio Cortes, manager of a commodities fund for Oakley Capital told the Financial Times that, “It has been challenging for commodities. The sentiment is very negative.”
Several Large Funds Close their Doors
Several big funds were hit especially hard in 2012, with industry leaders such as Blenheim and Clive Capital posting losses for the second straight year, sending investors to the exits. These firms, however, were relatively lucky. Some of the giants of the commodity segment were forced to permanently close their funds, including BlueGold, Centarus, and Fortress Commodities. While the shutting of these funds certainly hurts the segment’s overall assets under management, some of the withdrawn money was allocated to new or better performing funds in the commodity space.
Diversity of Commodity Industry Spares Some Funds
While most commodity funds struggled through last year, the damage was not completely widespread. Several managers did post positive results and accordingly saw investor money move towards their funds. Funds with an agricultural focus tended to do well in 2012, including the Black River Commodity Trading Fund, run by the asset management arm of agricultural giant Cargill. Other firms that outperformed their segment included fellow agriculture fund Dicken Commodities and the metals trader Red Kite.
As we’ve seen before with underperforming sectors, the structure of hedge fund management gives portfolio managers the opportunity to put their expertise to work and outperform their peers. Often the shakedown during a weak economic cycle for a particular hedge fund segment helps eliminate poorly managed firms or firms that have taken excessive risk. This creates opportunity for shrewd managers to showcase their abilities and win over new clients.
In the long run, the commodity segment of the hedge fund industry will continue to be a large aspect of the alternative investment universe. Future years will eventually bring better underlying performance to commodities and the refreshed industry will be better positioned to take advantage of that.