Commodity-trading hedge funds are having a strong year

The price of grain ripped higher earlier this year but wheat is now down 30% since May prices (Photo: AFP)
The price of grain ripped higher earlier this year but wheat is now down 30% since May prices (Photo: AFP)

Summary

Funds are among the notable winners from market turbulence. Some have pared bets as prices have retrenched

Some hedge funds that trade raw materials have generated blockbuster returns this year, making them among the major beneficiaries of exceptionally volatile commodity markets.

Prices for oil, natural gas, metals and grains ripped higher earlier this year as economies reopened from lockdown and the Ukraine war disrupted flows of energy and raw materials.

The flagship fund of e360 Power LLC, a Texas firm that uses futures and options to trade power, natural gas and emissions, has more than doubled, rising about 125% so far this year through September. The oil-focused fund of London-based Westbeck Capital Management LLP is up about 41% in the same period, while separate Westbeck funds concentrating on the energy transition are up around 14% and 15%.

At e360 Power, portfolio manager Mark Sickafoose attributed the firm’s performance to surging U.S. electricity prices in the first half of the year. He said electricity prices would remain volatile, likely boosting future returns.

However, the firm cut investments in European power from the second half of May, owing to concerns about the Ukraine war and regulatory changes in Europe regarding coal plants.

The hefty gains make these investors among the winners—alongside energy companies and resource-rich states like Saudi Arabia—from a period of surging prices and extraordinary volatility. The turmoil has helped push inflation to multidecade highs and spurred some governments to bail out power companies or subsidize household energy costs.

The performance also differs starkly from funds that pick stocks, particularly those that focus on high-growth technology companies. The HFRI 500 Equity Hedge Index is down more than 11% this year through August. Hedge funds with a broad macroeconomic focus, on the other hand, have shined this year.

Some major multistrategy funds, which invest in a range of assets, have also thrived in commodity markets. Hedge-fund giant Citadel LLC’s flagship fund told investors it got more than 60% of its second-quarter gross investment gains from commodities, documentation viewed by The Wall Street Journal showed.

Yet as the global economic outlook has darkened, and commodity prices have fallen, some fund managers have scaled back their bets. As of Tuesday’s close, crude prices had dropped by about 26% from their June high, while wheat has fallen 30% since May and European power prices have fallen by more than half since late August.

“This is just turning into a year of two halves," said Robert Howell, a portfolio manager at New York-based Gresham Investment Management LLC, which oversees around $7 billion in assets. Mr. Howell said a strong dollar had dented commodity demand from emerging markets, and noted that Russian oil had continued to flow to some international markets.

Mr. Howell said he had aggressively sold positions in recent weeks and now half of his portfolio sits in cash. “We are basically leaving the party," he said. “We’re in full-on capital-preservation mode." Mr. Howell’s strategy is up about 17% through September.

Others have shifted to actively anticipating further selloffs. Alena Kykalova Brynjolfsson runs Palo Alto, Calif.-based Tiara Capital, an energy-focused quantitative trading firm specializing in machine-learning. Ms. Kykalova Brynjolfsson has taken profits throughout the year from her bets on U.S. and European natural-gas and oil futures.

At the beginning of September, her models started reflecting a more bearish outlook. That prompted her to place bets that natural gas and oil would fall, after a huge peak in natural gas in August.

Some investors have shifted back and forth, underlining the uncertainty in commodity markets.

Reports that the Organization of the Petroleum Exporting Countries and Russia, the cartel’s main ally, will consider cutting oil production sent crude prices higher this week.

Westbeck changed tack in mid-June, exiting longer-term positions and focusing more on shorter-term trades, said Jean-Louis Le Mee, the firm’s co-founder. But the firm, which manages about $600 million, has more recently begun to add to its long positions, or bets that prices will rise.

Mr. Le Mee pointed to a host of unknowns, including uncertainty over whether China would relax its zero-Covid measures and the prospects for global recession. On the other hand, he said oil prices could rise due to the OPEC+ cuts, a possible end to releases from the U.S. Strategic Petroleum Reserve and the year-end European oil embargo on Russia.

Investors appear to be scaling back expectations of future Federal Reserve interest-rate rises, Mr. Le Mee said. That could imply the dollar has peaked, which would offer further support for oil prices, he said.

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