Commodity hedge funds suffer longest losing streak on record
Funds betting on commodity price moves have lost money every month since January, their joint longest losing streak on record, raising more doubts about their ability to make money at a time when the commodity "supercycle" may be over.
The average fund slid 3.58 percent in the first half of 2013, according to a widely watched Newedge commodity index. Funds have suffered five straight losing months only once before, in 2002-03, the index shows.
Hedge funds market themselves are capable of making money in all markets, yet funds trading commodities as varied as gold, grains and gas have failed to turn an annual profit in the past three years.
The weak performance will put more pressure on the industry to lower fees and introduce clawbacks, which enable investors to reclaim some performance perks paid to hedge fund managers in boom times if the returns they hope to achieve fail to continue.
Worries about cooling demand in key markets like China and a supply-side shift to glut from shortage have sent prices tumbling in recent years and left many warning that the end of the commodity "supercycle"—the long period of rising commodity prices—has arrived.
"Historically, most of these funds have been a levered beta play on the commodity cycle, or in some cases arbitrageurs of commodity spreads," said Michele Gesualdi, portfolio manager at hedge fund investor Kairos.
"The end of the supercycle has hurt the first area, while the volatility and discrepancies that have arisen in forward markets have made life difficult for the second," he said.
Adding to the sector's woes, hedge funds that trade other asset classes such as equities have rebounded this year, including those that trade mining and energy shares.
The $1 billion fund of Clive Capital, a firm that trades oil and ran about $5 billion at its peak, was down 3.5 percent as of the end of June, performance data show. Krom River's Commodity Fund had lost 4.4 percent, while Brevan Howard's Commodities Strategies Fund was off 2.5 percent.
Krom River CEO Itay Simkin said that despite falling prices, commodities were still a good investment because of production problems, urbanization, decent economic growth rates and a lack of forward investment in mining.
Other funds mentioned in this story either declined to comment or could not immediately be reached for comment.
Funds trading bullion are nursing some of the heaviest losses. Gold has tumbled this year on expectations that the Federal Reserve will taper its money-printing program, which had driven gold to record highs.
Billionaire investor John Paulson saw his gold fund (his smallest, with $300 million in assets) plunge 23 percent in June. It is down 65 percent this year.
Some have shone. After losing 30 percent in 2011, and 7.6 percent and a big chunk of its assets in 2012, Mike Coleman's Merchant Commodity Fund is up 24.2 percent this year.
But the bigger concern for commodity funds is proving that they can consistently make money amid a sustained downward trend in prices.
The problem, investors and managers say, is that the long, gradual trend of rising prices has been replaced with shorter, more uncertain trends, in which prices can plunge suddenly, making it difficult to profit from their slide.
Commodity prices, down 22 percent from a 2011 peak, have entered bear territory, while volatility—which some funds thrive on—has also fallen, challenging managers further.