UOB Kay Hian, one of Singapore's largest local stockbrokers, has partnered with boutique fund manager Aisling Analytics to launch The Merchant Commodity Fund, a relative-value commodity fund with an Asia focus.
The fund was launched on June 21, seeded with $10 million by two Swiss family offices.
UOB Kay Hian is the fund manager, and will take responsibility for the business side of the fund, including risk management and operations. The fund advisor handling the portfolio, Aisling, was founded by two ex-Cargill Investor Services traders, Mike Coleman and Doug King.
UOB Kay Hian director Paul DeVierno says the Merchant fund takes a unique approach: "While most commodity hedge funds take a directional approach, our fund adopts a relative-value trading strategy to the commodity sector, and also has an Asia focus," he says.
Coleman explains that the fund's approach to commodities is analogous to equity pair trading. "There are relationships between commodities that are cyclical or mean reverting," he says. "We can exploit this by taking advantage of spreads between different grades of the same commodities, different geographical locations of similar commodities, as well as spreads between raw materials and finished goods, such as crude oil and processed oil."
He expects the fund to return 20% per annum, and experience low to medium volatility, less than a directional fund.
"Commodities are on the radar screen again," says Coleman. "Commodities lost pricing power during the bear markets of the last 20 years where there was a structural oversupply of commodities and a slowdown of global demand growth for raw materials. However, in recent years demand has been boosted by the large numbers of people moving up the income scale in China and India. In a demand-driven market there are more periods of stress and distortions, and this lends itself well to a relative value approach."
DeVierno says the fund stands out for its Asia focus: "China is becoming a huge factor in demand for global commodity products. More of the trades in commodities are happening in this time zone."
Coleman, who was previously the global head of rubber trading and regional head of the petroleum business at Cargill, says he is well positioned to run fund: "I've spent 20 years trading commodities in Asia. The region's active commodity markets, such as Singapore's rubber futures market, Malaysia's palm oil market and Thailand's agricultural exchange, are not very well understood by those outside," he says.
His partner Doug King spent a decade at Cargill as global head of petroleum trading operations. In 2000, King joined a Russian banking group to establish a global petroleum business before partnering with Coleman to form Aisling.
Carlos Lin, also ex-Cargill, joins the Aisling team as an analyst.
DeVierno says his background as an oilseeds trader at Cargill prompted him to see the relative value opportunities in Asia's commodity markets and seek out Coleman and King, a team he felt had the expertise to manage this strategy.
This is UOB Kay Hian's second hedge fund product. The group also runs an Asian relative value fund, managed by DeVierno, which currently stands at $17 million. Coleman says that initial feedback from investors has been very positive. He hopes the fund will reach the $100 million mark over the next twelve months, and expects to raise $500 million over the next three years.
Cargill Investor Services is the fund's prime broker and Dexia Trust Services its fund administrator.