Investors cash in with commodity trading strategy



In a turbulent year for the commodities markets, some investors believe they have found a winning strategy: wait.

Extreme weather conditions and an uncertain economic outlook have pushed up prices for commodities ranging from coffee to natural gas to soybeans this year. In many of these markets, the cost of products delivered today is higher than in several months. This opens up a number of ways for investors to profit.

How it works: A fund manager buys a futures contract for delivery next month. Just before it expires, the investor sells the contract, buys a cheaper one for delivery at a later date, and pockets the difference.

It is a rare opportunity to earn regular income from commodities, which do not offer interest payments like bonds or dividends like some stocks. It is also unlikely to last: in most markets, short-term prices are higher due to shortages caused by droughts, disease and other factors that are likely to subside in the months to come. to come.

Until that happens, investors are happy to cash in. The additional income from commodities is a welcome development at a time when interest rates are at record highs in most developed countries. Some fund managers are also looking to commodities as doubts hang over the ability of stocks to continue to hit record highs.

The current roll return is helping fuel a recovery in investments in raw materials. Here, the cocoa beans are brewed at a Dole Food factory in Hawaii.


“You get paid just to own [commodities]”said Nicholas Johnson, commodities portfolio manager at Pacific Investment Management Co., which oversees $ 25 billion.

“There is a compelling reason to hold commodities as an inflation hedge or source of diversification, but today what makes it particularly attractive is this positive ‘roll’ return.”

In July, investors would benefit from this price structure in 11 of the 24 commodities of the S&P GSCI index. Since 2008, short-term prices have been higher in an average of about seven commodity markets. A fund tracking the index would have gained 1.8% on futures this year, while the index itself is down slightly.

Investors pursue this strategy by using futures contracts as well as exchange-traded funds, which buy futures contracts on behalf of shareholders. For example, shares of US Oil Fund LP, an ETF, have risen 4.4% so far this year, surpassing a 1.6% increase in oil prices on the New York Mercantile Exchange.

Trade is helping fuel a recovery in commodity investments, which had seen declining interest from fund managers over the past three years as yields were lower than stocks and bonds.

Citigroup estimates that fund managers invested around $ 7.5 billion in commodities markets during the first half of 2014, after net redemptions of $ 30 billion in the first half of the previous year and withdrawals from $ 50 billion for the whole of 2013.

A pricing model offers a rare opportunity for stable income from commodities.

Associated press

Granted, commodities continue to underperform stocks, even taking into account monthly income from renewing futures contracts. Gains from buying and holding commodities can be quickly wiped out if the underlying price drops, a significant risk in markets where weather conditions and other unpredictable factors regularly trigger price fluctuations.

Some investors don’t expect trade to take much longer for certain commodities. A bumper soybean crop will likely leave this market flush with supply, making food companies less incentive to pay higher prices to secure short-term supply.

“It looks like we’re gearing up for a pretty good harvest season, and that creates a situation where the [bonus from rolling] will be withdrawn over time, ”said Michael Strauss, chief investment strategist at Commonfund Asset Management Co., which manages $ 25 billion.

Mr Strauss said he has been underweight commodities over the past year and continues to prefer holding other assets.

For now, monthly income is still a draw for many investors.

David Hemming, who manages $ 1.6 billion at Hermes Fund Managers, said he has short-term pork futures that he plans to roll over to take advantage of the price structure in that market.

Pork futures for August 2015 are 29% below the August delivery price. Food companies are willing to pay extra to get pigs now due to a shortage caused by a virus.

“The roll return has been positive for investors … this is one more reason to invest in commodities,” said Mr. Hemming.

Corrections and amplifications

Pork futures for August 2015 on Tuesday were 29% lower than the August 2014 contract price. An earlier version of this article incorrectly stated that the pork futures for August 2014 were 29% higher to those of August 2015. (July 16, 2014)

Write to Tatyana Shumsky at [email protected]

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