Estlander & Partners, the Finnish manager currently known for its systematic strategies Freedom, Presto and Alpha Trend, is launching a commodities fund to take advantage of an improved market environment in which it argues different commodities have become priced on fundamentals rather than the general risk on/risk off approach seen in the wake of the financial crisis in 2008.
The new fund has been seeded by a Nordic institutional investor, and launches with assets worth about $30m. As an alternative investment fund, the vehicle will target institutions, high net worth investors and family offices, while taking advantage of the passporting opportunities the regulations enable.
The fund will use analysis of fundamentals around commodities – such as information on inventories of specific commodities – along with analysis of trends to identify opportunities to invest in long and short positions.
Gillis Danielsen, portfolio manager, explained that there are three “themes” the portfolio will follow.
The first is to utilise the existing skills the manager already has with managing CTA stratetgies, and look for long term trends that can be approached in an agnostic manner by taking either long or short positions.
The second is to look at spreads in markets, to look at futures curves, and utilise carry trades. This type of trade has been affected by central bank intervention in markets, but the basic tenet that carry is the result of producers seeking to avoid risk still holds, Danielsen said. An example would be the period last autumn when the forward price of shale oil fell below the spot price, meaning that producers would have sought out ways to mitigate risk to themselves. While each commodity may have a different story, the carry can “work well when producers face tight margins and need to hedge themselves further out.”
The third theme concerns supply shocks, which are exacerbated because of inelastic demand. Danielsen characterises the opportunities here as being “the short term long biased part of the portfolio.” The portfolio management will be looking for signals of pending supply shocks, for example, looking to inventory information, which can give an idea of the likelihood of short term trends.
Martin Estlander, chariman, said the new product was not surprising given the historical exposure to commodities as an asset class in the manager’s existing strategies. Alpha Trend, for example, has had some 40% exposure to commodities.
And while many investors have pointed to a commodities cycle that has gone into decline, Estlander argues that the timing of the launch matches ongoing demands from investors for both exposure as well as risk mitigation by diversification.
“The commodity sector has been depressed over the past few years due to the lengthy unfavourable phase in the business cycle for commodity prices, with many investors reducing allocations in the space. However, we believe that actively trading commodities both on the long and the short side offers opportunities that are a valuable part in any diversified investor’s longer term allocation. In addition, the fact that investment banks and several funds have recently withdrawn from commodities has created exciting new opportunities.”
Estlander added that the diversification element was the sort of factor that would suit an investor such as a pension fund looking for alternatives, and that the manager was already talking to a fund of funds about the new product.
“Think of it as an absolute return product over the cycle.”