NEW YORK – The nearly two-month-long slide in oil prices to 6-1/2 year-lows has been a boon to many so-called systematic funds, which trade based on technical signals or computer algorithms rather than fundamentals.
While most market commentary has focused on the persistent glut in the global market caused by unrelenting OPEC output and surprisingly resilient U.S. shale production, these commodity trading advisors (CTAs) have ridden the downtrend to robust returns.
It is too early to say how most of them fared on Thursday, as oil prices surged by more than 10 percent in the biggest one-day gain since the financial crisis.
Interviews with five of the larger and best-performing CTAs also show that investors who opened or maintained short positions have reaped significant profits this year, despite a rally that began after the previous lows were hit in March.
Several of those successful funds have paid no attention to fundamentals like an oversupply from resilient U.S. production or concerns about Chinese demand. Instead, these “systematic” funds have simply let their algorithms respond to price trends.
Below is information on the strategies, exposure and results of systematic, trend-following funds with bets on oil and other commodities:
Assets under management: $4.8 billion, 30 percent to 40 percent allocated to commodities markets
Trading strategy: Quantitative, trend-following algorithms based on directional trends in prices, held over the medium-term
Position in commodities: Short position in crude oil for more than a year, prompting significant gains as crude fell from its peak despite giving back some gains in April’s turn higher and Thursday’s snapback rally.
The firm’s main fund was up 8 percent overall on the month as of Aug. 24, and around half those gains resulted from its short in crude oil.
“The trend-following models we’ve built don’t know or care what’s driving the prices,” said Chris Reeve, Aspect’s director of product management.
“Often the best profits come when people think the fundamentals don’t justify a trend but actually that trend continues, and it turns out maybe they do – the market’s view of fundamentals changes.”
QUANTITATIVE INVESTMENT MANAGEMENT
Location: Charlottesville, Virginia
Assets under management: Nearly $2 billion, small percentage allocated to commodities
Trading strategy: Short-term, systematic algorithms, using price indicators like momentum and mean reversions
Position in commodities: Short positions in U.S. crude and Brent crude throughout July, resulting in a gain of 84 basis points during the month. The fund lost 1.46 percent on the whole in July.
The fund switched to a long position in crude in August, resulting in modest losses. It remained long heading into Thursday’s snapback rally, and took profits as a result of the gains.
“Our models tend to do better in more emotional, volatile periods,” President Michael Geismar said.
Location: Rotterdam, Netherlands
Assets under management: $6 billion, with an average of 14 percent allocated to metals and energy
Trading strategy: Diversified, systematic, trend-following investments
Position in commodities: Has a short position in oil markets. Also built up short copper position after the current downtrend began in the second half of May, also short in other metals and energy markets. The fund has seen a roughly 7 percent gain in July and August so far, and its commodities shorts contributed a significant portion to that.
The fund also maintained its short position heading into Thursday’s snapback rally, meaning it suffered losses.
“We do not believe that trends occur all the time in all markets,” Executive Director Andre Honig said.
MILLBURN COMMODITY PROGRAM
Assets under management: Over $80 million in more than 45 commodity futures; nearly 40 percent is allocated to energy, mainly oil.
Trading strategy: data-driven, systematic fund
Position in commodities: A short position in oil has paid off over the past two months, resulting in overall gains of 5 percent in July, and nearly 8 percent this month, through Aug 24. The bearish bet has also helped drive an overall gain of 19.8 percent at the fund this year.
“We don’t claim to be experts in the sense that a discretionary trader might,” said Grant Smith, head of research for Millburn.
“If you think of yourself as an expert, you can sometimes cling to your preconceived ideas of what’s going to happen in the market. We are data-driven, and our models have no problem changing their view if the market says they are wrong.”
RED ROCK CAPITAL
Assets under management: $42 million
Trading strategy: Systematic trend-follower
Position in commodities: Opened up a short position in U.S. crude in early July with prices at $58.77 a barrel; they fell to below $40 a barrel earlier this week.
The fund is up almost 21 percent on the year, with almost 15 percent of that coming in the past two months.
“This is all very similar to the blackjack card,” said Thomas Rollinger, Red Rock Capital investment head. “Basically you are not going to win at every hand, but if you have a systematic strategy where you manage risk very tightly and you have a slight edge that you can implement, you will extract the return, or alpha, over time.”
(Reporting by Luc Cohen; Additional reporting by Eric Onstad and Barani Krishnan; Editing by Lisa Shumaker)
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