Mainly discretionary
Around 80% of the managers are discretionary, though this can include some hybrids mixing quantitative and discretionary strategies, which AlphaBee still classifies as discretionary. “We would need to see systematic execution to define a manager as purely systematic,” points out Arnaud.
Systematic managers and AI
“Systematic managers tend to trade global commodity markets and are more diversified across multiple commodities, but these only make up about 15% of our current commodity portfolio. We are mostly invested in more specialized commodity managers,” says Arnaud.
AlphaBee are researching AI strategies and Arnaud is meeting managers in the US. “A lot of strategies add value with processes using some forms of AI and have been doing so for a few years,” observes Arnuad.
Investment universe
All of them trade derivatives, futures and options, and not physical. “We avoid products that may become illiquid,” says Arnaud. Managers are mainly trading at the front end of the curve and will not be trading several years out as there is usually more liquidity in the first future contracts on the curve.
Managers trade mainly on the global liquid exchanges in the US and Europe and some in Asia, Brazil and South Africa, but not in Russia. Some OTC markets such as certain metals and freight can be traded, as well as some bespoke futures or forwards, so long as they can be cleared. Carbon futures are starting to become liquid enough to trade on multiple exchanges globally.
Commodities can trade on a variety of exchanges and other venues. “We also look at all liquidity providers to analyze how relative value arbitrage trading might work,” says Arnaud.
Freight, power and natural gas are the most volatile commodity assets and various uncorrelated strategies in those assets offer diversification.
Weather is not directly traded, but is an important analytical input, especially for agricultural markets and some energy markets. “Many managers use internal or external weather experts and try to understand the statistics including global warming. They want to predict the most probable weather,” Arnaud observes.
China is listing several commodity markets that do not trade elsewhere, and Arnaud is taking a carefully balanced view on the risk profile: “We have so far been very conservative on Chinese commodity futures, given the possible tail risks around a Chinese invasion of Taiwan. We therefore have most of our exposure to Chinese commodities via non-local prime broker swaps”.
Leverage and credit risk
Managers do need to use some leverage to exploit arbitrages, and this is mainly obtained through margin trading of futures via prime brokers.
Managers can leverage up their trading strategy but leverage itself should not be the source of returns. Commodity trade finance is a large market where banks and funds are active, but it does not fit AlphaBee’s risk profile. “We do not like trade finance or leasing strategies as they can have credit risk,” says Arnaud.
US investors and managed account platform
“Most of our assets are in a regulated Luxembourg fund, but another investment vehicle has been set up to cater for US investors, with Kettera Strategies based in Chicago as the Commodity Pool Operator. The opportunity set is larger to invest into funds, however the Hydra platform managed by Kettera is an exception where we can invest in managed accounts. Hydra has been approved through internal and external ODD,” says Arnaud.
“We advise a bespoke US family office mandate with whom we co-invested and we benefit from synergies between their analytical teams and ours,” says Arnaud.
