Tough Times Ahead For Commodities After Harsh Shakeout

Volatility Jumps

The sudden jump in volatility in the summer, after a prolonged period of stable prices, caught out some managers.

"Because the volatility was so low, a lot of people leveraged up to improve returns. That explains some of the huge drawdowns," Gerlach said.

The 14.35 percent average loss in 2014 was worse than the previous year's average drawdown of 9.98 percent and reflects the fact that many commodities sold off hard in the second half.

The S&P GSCI, a popular commodity index, ended the year down over 33 percent, clobbered by a fall of 50 percent in Brent crude prices since June and losses of 44 percent for the year for the energy sector as a whole. Grains, silver and copper also sold off hard.

Barclays said 2014 was one of the "most difficult years ever" for broad-based commodity investments, with an expected decline of some $50 billion in commodity assets under management for the full year.

The double whammy of price falls and redemptions led to the closure of several big name commodity strategies including those of Hermes, Brevan Howard, Hall Commodities and Schroders Opus, a fund of hedge funds.

The question is whether those investors who crashed and burned will ever return. In the long-only space, investors have traditionally used commodities as an inflation hedge, so with deflation on the cards, gathering assets looks like an uphill struggle.

"Inflation hasn't come back and that goes hand-in-hand with the asset class not coming back. Investors are hesitant and you see that with the withdrawals," said Gerlach.

Barclays estimated outflows from commodity indices at about $18 billion in January-November, far greater than the previous all-time high of $7.4 billion withdrawn over 2013 as a whole.

But Goodman said some investors were starting to look at multi-strategy commodity funds as a diversifier to reduce volatility and improve portfolio efficiency.

"It will come down to whether a manager can make money in different market environments and deliver non-correlated returns," he said. "But that requires a more complex decision-making process."