Many hedge funds invest in commodities as a strategy. The investment professionals who trade commodities rely on highly specialized techniques to be profitable because of the volatile nature of many commodity investments, including energy. Energy prices moving on an upward trajectory tend to attract more hedge funds into the commodity space as investment professionals seek to capitalize on the greatest profit opportunities.
Hedge funds apply different strategies to profit from commodity investments, and in some cases bet on a sector's decline. In 2011, investment management firm Mellon Capital Management started a commodities hedge fund with a long/short strategy, according to Hedge Week. The fund was designed to take both long and short positions in various commodity contracts, ranging from agricultural items to metals and energy. The long trade is a bet that a commodity's price will rise, while the short end of the trade suggests the commodity's price is expected to fall.
There are a variety of different types of commodities, and a hedge fund might invest in one or more of them. On the energy front, hedge funds might invest in traditional oil and gas futures, which are contracts that trade based on movements in the fossil fuel markets. A 2010 article on the Risk website suggested that hedge funds were examining the way that regulation for renewable energy commodities was taking shape to determine the investment potential in this market segment.
Hedge fund managers typically set profit expectations for an investment fund, including commodity portfolios. Commodity prices can be volatile, however, and this can interfere with even the best investment managers' strategies. In 2007, Fortress Investment Group started a commodity hedge fund and issued a forecast for returns, or profits, of up to 20 percent each year, according to the Bloomberg website. In 2011, the hedge fund had shed 3.7 percent through August, according to "The New York Times."
Hedge funds do not typically shun risk, as the trading strategies and tactics used are often highly speculative. Fund managers are also typically astute and opportunistic, and historically withdraw assets from commodity exposure when prices are trending lower. According to a 2010 article on Risk.net, hedge fund investors fled commodities following the financial crisis of 2008, but returned to the asset class after market recovery began. By 2010, however, energy commodity prices retreated and hedge funds began exiting the sector once again.
- Risk.net; What Next for Hedge Funds in Energy? ; Rachel Morison; March 2010
- Bloomberg; Fortress Investment to Start Commodities Hedge Fund;Saijel Kishan; November 2007
- "The New York Times"; Earnings at Fortress Drop 37%; Azam Ahmed; August 2011
- Hedge Week; Mellon Capital Management Launches Commodities Strategy; August 2011
- Brand X Pictures/Brand X Pictures/Getty Images