The strategy is now more appealing than equity strategies on risk-return measures
July 24, 2024 (Preqin News) – Metals-exposed hedge funds have outperformed all top-level hedge fund strategies so far this year, delivering a 7.9% gain in H1 2024, losing 0.3% from their peak at the end of April.
While gold and other metals have soared in 2024 – driven by escalating geopolitical risks, the interest rate outlook, inflation hedging, and central bank buying – analysts at JP Morgan see room for further rises. The investment bank is forecasting an average price for gold in Q4 2024 of $2,500/oz, up from $2,300/oz at the end of June. It noted that, over the past two years, the price of gold has decoupled from the outlook for interest rate cuts and US real yields.
Metals-exposed hedge funds recorded three consecutive months of gains, for a cumulative gain of 8.2% for the year to April, outperforming all top-level hedge fund strategies.
Fig. 1: Metals-exposed hedge funds outperform
Cumulative net returns by hedge fund strategies in H1 2024
Source: Preqin Pro. Data as of June 2024
Investors have had to contend with rising geopolitical tensions and market volatility. Policymakers remain cautious on interest rates amid conflicting economic signals and stubborn inflation causing continued uncertainty around the speed and timing of rate cuts by the Federal Reserve.
Metals-exposed hedge funds appear relatively attractive in risk-return terms when measured by Sharpe ratios. While the three-year ratio of metals-exposed funds (at a risk-free rate of 2%) has fallen from +0.60 to +0.27 over the past 12 months, the fall is less than for equity strategy funds, which declined from +0.80 to +0.10 over the same period.
On July 18, gold was up 24.7% over the year, ahead of silver (20.9%), and copper (13.2%), with prices for iron ore (-2.88%), steel (-11.7%), and lithium (-71.1%) falling, according to Trading Economics.
O’Brien Investment Group Quantitative Global Macro Futures Fund, which systematically trades in commodities futures including metals, was up over 5% in April alone. Equinox Partners Precious Metals Fund which invests in undervalued precious metals mining companies, also made gains of 5% in the same month.
However, nearly 40% of the LPs surveyed for Preqin’s Investor Outlook: H1 2024 thought that commodity market volatility would be one of the key challenges for hedge funds return generation, up from less than 20% a year earlier.
Copper prices, for example, have already pulled back from record highs seen in May, with the uncertainty over rate cuts and seemingly tepid demand in China for the commodity, despite a pick-up in electric vehicle manufacturing and energy transition investment, both of which increase demand for copper.
Metals-based commodities offer the potential for strong returns. But future performance will depend on fund managers being able to navigate market volatility and capitalize on arbitrage opportunities.
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.