Tough Times Ahead For Commodities After Harsh Shakeout

After one of the worst years in memory for commodity funds, even the few managers who found a way to make money last year say they expect a difficult start to 2015.

Collapsing oil and grain prices caused havoc for commodity funds in 2014, with the average actively managed fund in the Lipper Global Commodity sector losing 14.35 percent. Big names abandoned the field altogether, and investors redeemed billions.

A handful of managers were nevertheless able to exploit the sudden mid-year surge in volatility and the fall in prices. But even they expect a difficult 2015 with pressure on prices to fall further.

"It's the worst place to be, but a long/short fund still has a lot of opportunities," said Christian Gerlach, portfolio manager at Swiss & Global Asset Management, whose Julius Baer-branded commodity strategy was one of the few to perform well, up 6.09 percent in 2014.

Funds like Gerlach's can bet on prices going down as well as up. "It's a market neutral strategy, so we're always hedging our positions – that helps in such a bad long-only environment," Gerlach said, citing profitable shorts in grains, oil and sugar.

Other top performers in 2014 were systematic managed futures funds that use sophisticated computer models to crunch data.

Millburn Commodity and Man AHL Diversified both delivered returns of over 30 percent in a year that saw the worst performers lose more than 30 percent.

"Our strategy made money by shorting energy and grains, probably similar to other CTAs (Commodity Trading Advisers), but we were also profitable in the first half when crude and other markets moved sideways," said Barry Goodman, executive director of trading at Millburn Ridgefield Corporation.

Millburn's models analyze up to 20 factors in each of the markets they trade, to generate signals that determine whether to go long or short and how big a position to take.

Going into 2015, Millburn's positions are relatively light, using less than 30 percent or so on average of the potential risk that could be deployed.

"Our models have become a bit more risk averse," Goodman said. "With only a few exceptions, like natural gas, signal strengths are relatively modest – there are few major short or long signals."

Gerlach echoed this, saying he had a low net exposure as he was short energy, long agriculture and flattish on metals: "We always start small and if we are profitable we leverage up. But we haven't yet found a real value market."

Gerlach believes drawdown management -- limiting the potential risk of bad bets -- will be even more important than in 2014: "We will look for things to bottom out -- it won't be the time for really massive short positions," he cautioned.

However, with volatility creating more divergence in performance among different classes of commodities, he believes it is worthwhile approaching the market again.