Hedge Funds Spur Bets on Commodity Rebound

Two new commodity hedge funds launched in early 2016; allocations to commodity strategies $1.22 bln in Jan.

After deserting commodities markets during last year's slide, some hedge funds are starting to move back in, betting a recent pick-up in energy prices could signal a turning point.

A handful of managers are weighing up new specialist hedge funds, industry data shows, while some funds are stepping up exposure to energy markets and oil in particular.

Leading commodities indexes rallied on Friday after the International Energy Agency (IEA) signalled a possible floor in the price of oil which has slumped 65 percent since June 2014, hitting global growth and stocks.

"Family offices and institutional investors have started asking us about our positioning in commodities sectors, but mostly focusing on oil," said Samantha Gleave, co-manager on the Liontrust GF European Strategic Equity Fund.

The fund began building positions in energy stocks such as Tullow Oil (TUWLF), Weir Group (42W.SG) and Soco International (SOCLF) late last year, and has started to increase its commodity exposure through BHP Billiton (BHPLF) more generally over the last couple months.

Investors resumed consistently allocating money to hedge funds and other strategies focused on commodities in September and have been steadily upping funds since, reaching $1.22 billion in January, the largest allocation since July 2014, eVestment data shows.

A survey of investors published in February by Barclays (BCS) showed allocations to hedge funds investing in the commodities sector are set to rise 5 percent in 2016.

The flurry of interest has encouraged asset managers to raise bullish oil bets for the third week in a row, according to data from the U.S. Commodity Futures Trading Commission, which showed net long positions up 35 percent on the previous week.

NEW LAUNCHES

Two new commodity funds have launched in the first 60 days of 2016, compared with just five launches and 17 fund closures in 2015, data from Preqin showed.

The first - $110 million Kimura Capital - will fund the transportation of commodities, while the second - Westbeck Capital Management, formerly Westbrook Asset Management, - hopes to generate returns through bets on small and mid-sized oil companies.

Jean-Louis Le Mee, partner at Westbeck Capital Management, is no stranger to the vagaries of commodities markets.

Five years ago when commodities were booming, Le Mee quit BlueGold Capital Management, one of the world's largest commodity hedge funds, to strike out on his own.

But by the time his new mining and energy equities-focused Abydos Capital was ready to launch in July 2012, BlueGold had shut with final-year losses of more than 30 percent, and mining stocks had slipped by 38 percent.

Abydos grew to $200 million but shut down after losing money on the back of a slump in the oil price from more than $110 a barrel in July 2014 to below $85 by that October.

This time Le Mee, who reckons oil hit a turning point at under $30 a barrel in January, believes he has timed the cycle correctly.

"We decided this was a once-in-a-career entry point," Le Mee said. "A lot of investors are starting to realise that the current oil price is not sustainable and we have to move higher," he added, despite "a bit of uncertainty" on how high prices would go and how quickly a recovery would happen.

BRAVE

Some ultra-brave investors are even thinking about taking the plunge directly into commodities.

The phone at European energy futures and options hedge fund Quality Capital Management (QCM) has gone from ringing once or twice a month in 2015 to three or four times a week, Chief Investment Officer Ulf Ek told Reuters.

But commodity markets aren't easy to read, with little certainty about demand and supply in China - the world's second-biggest economy and the engine of the last commodities boom - or the intentions of the world's top oil exporter, Saudi Arabia.

"It's hard to play commodities when bigger things are at force like Saudi and China," said Simon Ruddick, chairman and co-founder at consultant Albourne Partners, which advises on $400 billion of hedge fund assets.

The S&P Goldman Sachs Commodity index closed up 102 points at 2,170 following the IEA report, after hitting a 26-year low in January. Further rises are expected to encourage more money back into the sector.

In anticipation, QCM has soft-launched a strategy called the Commodity Directional Programme, which makes bets on the price of industrial commodity futures.

"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," said Aref Karim, founder, chief executive officer and chief operating officer at QCM.

Tapan Datta, head of global asset allocation at Aon Hewitt, which advises pension funds on $35 billion of hedge fund assets, believes there are potentially some medium-term investment opportunities in the aftermath of the oil price collapse.

"We are working on the idea that there is stabilisation in prices and a modest rebound at work. Hedge funds are a way to play commodities given the likelihood that high levels of volatility are likely to continue."

By Maiya Keidan