Commodities have disappointed many investors over the last year but there are still gains to be made by trading spreads across and within commodity markets. VOC Capital Management, a small, specialist commodity-only fund manager based in London's Mayfair district, sees big profits in spreads in sugar, grains and natural gas, and expects to harvest yields by trading energy futures against base metals.
Arguing some wealth managers have been too simplistic in their approach to commodities, VOC uses analysis of price trends to develop a range of trading strategies in raw materials, which they say behave differently from assets in other markets.
VOC, starting with just $8 million under management, buys and sells derivatives in 24 commodities from crude oil to cocoa, trading spreads in the most liquid, dollar-based markets. VOC partner Nicholas Denbow, a former AIG Tradingstrategist who co-founded VOC in 2009, says there are distinct patterns in commodity markets that offer trading opportunities.
"It doesn't matter whether (there) is a shortage in wheat, or in cocoa or gold. It is going to impact a market in a similar way. If supply is lower than demand, irrespective of commodity, you are going to see a certain price behaviour," said Denbow.
Many commodity prices have been relatively stable over the last year, offering limited capital gain to long-only investors. Several markets have also been in contango with prompt prices cheaper than futures, bringing roll losses for index investors.
US crude futures have spent most of the year between $70 and $80 per barrel with implied volatility near 30 percent, close to a two-year low. "Some have suggested commodities have somehow failed as an investment. But it is not commodities that have failed," said VOC co-founder and partner Christiaen van Lanschot. "Don't blame commodities. It is the approach that is too naive, too simplistic for what is an incredibly complex, dynamic market."
VOC, which aims to be dollar-neutral, uses eight different strategies to try to capture anomalies in commodity markets, where prices may have moved too far or too fast, trying to pick longer-term trends and avoid short-term volatility.
"One play that has been working well has been a spread between base metals and energy," said Denbow. "We have been structurally long base metals and short energy." "The fundamental ethos behind that is that if the world picks up, China as the engine of growth will drive metal consumption and push base metals higher," he said.
"The anticipation is that metals will do better than energy. That doesn't mean we don't think energy will do well - we do. It is just that metals are likely to be better." VOC declined to discuss in detail returns for the year so far but said it had been net positive at a time when total returns for most commodity indexes had been negative. Some of its best returns have been from intra-market trading.
"One strategy we have at the moment is going short the front end of natural gas futures, for example November, versus being long March 2011," said Denbow. "We believe that spread will widen out ... go to a greater contango."