According to a Bloomberg story, hedge funds in commodities are back and making money. My interest in hedge funds commenced back around 19-years ago when Peter Fusaro and I started investigating commodity funds. We ended up writing the book Energy & Environmental Hedge Funds – The New Investment Paradigm (Wiley, 2006) as well as working with a fund of funds to put together a commodities fund of funds. It was actually a great deal of fun! Then residing in Houston, my trips to London and Switzerland to meet fund managers opened my eyes to a different side of the business of commodities and to a different lifestyle too. I recall staying the the Conservative club in the City, meeting the MP for my hometown accidentally there and waking to breakfast on a tray and freshly shined shoes from a bone fide butler! However, what I also learned was that despite all their hype, most of the funds and managers were not so much financial whizz kids as fairly ordinary but well-connected people running a variety of long only strategies. For a while, we did brisk business selling subscriptions to a directory of funds but then when the bull market in commodities crashed, so did most of those funds.
So, to see the Bloomberg article was quite fun. It talks in the usual starry eyed fashion about some of the fund managers but I’m going to take a guess and bet that many of these new funds are also quite straight forward long only funds in equities and the like. Nothing special and honestly easy to get returns so long as prices keep going up. Heck, back twenty years ago, I self managed my 401k for 60% annual returns – it was hardly difficult to make money. Of course, the real stars were the commodity trading funds – these were the guys who really did take risk for reward but actually, they were quite few in number. Strangely enough, when I left the world of analysts to manage the operations of a European power trader, it was a speculative trader that had started as a hedge fund!
I’m not surprised to see the funds are back – possibly late to the party as well I imagine as in 2023, stagflation and other issues may well emerge to put a dampener on things – we will see. However, with volatilities, prices and headlines the way they are, money is going to find its way to managers and probably in record amounts. Hedge funds also represent potential clients for ETRM and CTRM vendors. In fact, some vendors like Brady Igloo, have the money and investor management functionality as well as the typical ETRM functionality in their solutions and already count numerous funds as clients. However, despite the Bloomberg headline, I suspect, as aI stated earlier, a lot of the funds will actually be commodity equities, debt or other such instruments as opposed to out and out trading. Despite that, there are I hear quite a lot of traders setting up smaller entities these days and a trading fund can be an interesting way to get started.