Asian commodity markets could benefit if the US were to bring in certain commodity-trading rules currently under discussion, says Andrew Karsh, New York-based co-lead portfolio manager of Credit Suisse’s total commodity return strategy.
He suggests that commodity-trading flows to
There are already more commodity-investment managers accessing Asian markets than a few years ago, says Karsh, and if commodity traders at banks or asset managers could gain outperformance from using local exchanges in
Nevertheless, commodity investments are growing in popularity in
Still, Karsh argues that commodities are a form of inflation insurance, particularly against unexpected inflation, as well as a portfolio-diversification tool. The best approach, he adds, is to be exposed to a broad basket of commodities
That way, the investor gets a wide range of volatility, says Karsh – for example, natural gas has a typical historical volatility of 55%, while that of lean hog prices is 12%. For example, the commonly benchmarked DJ-
Credit Suisse manages $5.3 billion in commodity assets globally, across three strategies: its enhanced-index strategy (launched in 1994), active strategy (Access, launched this year) and Gains (which started up last year and trades based on information provided by physical commodity trader Glencore, with which Credit Suisse has a joint venture). The three products are listed here in rising order of their target risk and alpha.
The team invests in a combination of futures and over-the-counter instruments, although it only started buying commodity swaps in 2004. That’s because it started offering Ucits-compliant commodity vehicles to broaden the investor base, and such funds cannot invest in physically settled futures.
“We’ve been finding that many investors in
He adds that the team can generate more alpha through futures-based strategies, because it’s possible to trade individual commodities and thereby generate outperformance on, say, corn or crude oil individually.
As for why commodities are particularly beneficial in times of unexpected inflation, he explains that it has to do with the way they are priced. For instance, when pricing stocks, investors use the discounted-cashflow methodology, which projects a certain amount of cashflow and earnings for the next five years and discounts that back to achieve a share price estimate.
Commodities are effectively the opposite, in that they use the futures curve to predict what will happen to the price, says Karsh. “So if crude is $78 [a barrel] today and November crude futures are trading at around $85-90, the market is taking into account potential supply/demand and also inflation to predict where the price will go,” he says.
As a result, if expectations of inflation or real inflation levels suddenly rise, the crude oil futures price will also rise, and the market will re-price its expectations accordingly -- in this case to, say, $90-95/barrel for the November futures contract. Hence, only a small rise in inflation expectations (of, say, 1%) can bring a significant profit for owners of futures contracts.