Performance in 2014 was disappointing for the overall hedge fund industry, with commodities hedge funds proving to be one of the worst performing strategies, generating returns of -5.66% in November 2014. Funds have been hit particularly hard by falling commodities prices and political intervention that has created volatility in the market. The steep decline in energy prices, and most importantly oil prices, towards the second half of 2014 saw commodities managers deliver five months of consecutive losses between July and November. 2014 may be the second consecutive year of negative performance posted by commodities managers, following the loss of 5.19% in 2013. This represents a dramatic fall for commodities hedge funds, following annualized double-digit net returns above 20% in previous years (excluding 2008, when commodities funds generated -9.45% on average). This blog takes a look at how recent performance may have affected the commodities hedge fund space.
Investors with a preference for investing with commodities hedge funds currently make up approximately 17% of Preqin’s Hedge Fund Investor Profiles online database. The above chart shows that in 2011, approximately 21% of hedge fund investors had exposure to commodities hedge funds – a figure that has been slowly decreasing ever since. Given the relative poor performance of the strategy in previous years, this decline is not radically steep and has not deterred investors’ allocations to the asset class. Investors investing in commodities have a current average allocation to the asset class of 16.3% of their overall portfolio, compared to 14.3% for the rest of the investor universe. Performance is perhaps the most obvious reason for this decrease in appetite, although other reasons may include a growing interest in socially responsible investing, or ESG investment policies. AP-Fonden pension funds, for example, are prohibited by their matter of investment policy from investing in commodities.
Investor appetite is not the only aspect in decline as a result of poor recent performance; the number of new funds trading commodities has also decreased. Preqin’s Hedge Fund Analyst database shows that there has been a sharp decline from 2011 and 2012, which saw 61 fund launches in each year, to 2013, which saw only 20 new funds launched. Preliminary data suggests that 23 new funds launched in 2014 focused on commodities. Although this number may rise as more data becomes available, it is unlikely to reach the heights of 2011 and 2012. The declining number of fund launches could display a lack of fund manager confidence in being able to extract returns from the commodities space.
Despite the poor performance posted by commodities hedge funds, the decline in investor appetite does not appear to be as dramatic as what might be expected. Fundraising conditions will likely remain tough and it will be interesting to see whether interest in the commodities space remains buoyant should negative returns persist for a third consecutive year. Many might see the poor performance as part of a cycle, and be willing to increase exposure should they feel the opportunity is right.