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Systematic Traders Profit from Plunging Commodities Markets

News Items

Systematic Traders Profit from Plunging Commodities Markets

Craig Gilbert

CTA Intelligence Article, August 25, 2015
Article republished with permission of CTA Intelligence
By Matt Smith

Systematic commodity strategies are enjoying a strong August as concern about a China-led economic slowdown has prompted broad-based losses in commodity markets.

Chicago CTA Red Rock Capital saw its commodity long/short program jump an estimated 3.2% as commodities markets hit fresh lows on Monday with oil, coal, and copper all trading at 2009 financial crisis levels. The $41m in AuM strategy, which trades around 30 commodity futures markets, advanced to 7.6% this month and 22% YTD, according to source with knowledge of the performance. It returned 48% last year.

Connecticut-based Millburn Ridgefield Corporation has been another winner from the commodities rout. It’s roughly $80m commodity program¹, which trades around 45 markets, gained more than 2% on Monday to bring it to 7.6% in August, according to a person familiar with its returns. It left the long/short futures strategy up 19.8% YTD. The program gained 28% last year and has had only two losing months in the past two years. Energy has been the biggest return driver in August, but metals remain the top performer YTD, the person said.[Millburn note: As of August 31, 2015, Millburn's Commodity strategy was down approximately 1.9% for the month and up approximately 9.1% year to date.]

Meanwhile, London-based Beach Horizon, which runs a $96m systematic program trading global commodity, financial and foreign exchange markets, gained more than 4% yesterday, sister title HFMWeek understands. The firm was up 0.2% YTD as of July, having gained 42% last year.

US West Texas Intermediate (WTI) and global benchmark Brent Crude both hit fresh six-year lows on Monday, while raw sugar futures slumped to a seven-year low. China’s iron ore index meanwhile remains near record lows.

Commodities in general are back at levels not seen since 1999.

A raft of commodities-focused hedge funds have left the space in recent years after poor returns. Many systematic traders believe there are now significant opportunities to exploit.

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RISKS OF AN INVESTMENT IN MILLBURN COMMODITY PROGRAM (the “Strategy”) include but are not limited to the following: (i)  The Strategy is speculative.  Investors may lose all or a substantial portion of their investment in the Strategy; (ii) The Strategy is leveraged.  The Strategy will acquire positions with a face amount of as much as six to eight times or more of its total equity.  Leverage magnifies the impact of both profit and loss; (iii)  The performance of the Strategy is expected to be volatile. Since inception, monthly returns in the Strategy ranged from up 16.65% to down 7.09%; (iv) Investors will sustain losses if the Strategy is unable to generate sufficient trading profits and interest income to offset its fees and expenses; (v) A lack of liquidity in the markets in which the Strategy trades could make it impossible for the Strategy to realize profits or limit losses; (vi)  A substantial portion of the trades executed for the Strategy take place on foreign exchanges.  No U.S. regulatory authority or exchange has the power to compel the enforcement of the rules of a foreign board of trade or any applicable foreign laws.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Millburn Ridgefield Corporation, its affiliates or its employees.The information above is based on performance and other data available as of the date of this article or as otherwise noted. Any markets, models, leverage, portfolio weights and other data described herein change over time, but are accurate as of the date indicated herein.

The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Diversification does not eliminate the risk of experiencing investment losses. The information contained herein is intended for use by sophisticated investors who may be interested in opening a separately managed account. Prospective managed account clients must be "qualified eligible persons" within the meaning of CFTC Rule 4.7. Futures accounts are speculative, employ significant leverage, involve a high degree of risk, are not suitable for all investors, and may involve high fees. There can be no assurance that an investment strategy will achieve its objectives. This information is not a solicitation for investment. Such an investment may only be made on the basis of information and representations made in the appropriate written disclosure document.

¹Returns described herein are net of all fees, expenses and transaction costs typically incurred in a separately managed account trading the Strategy (2% per annum management fee; actual transaction costs incurred; 0.25% per annum ordinary operating and administrative expenses; 20% annual profit share, subject to a high water mark), and reflect the reinvestment of profits.