The second quarter of 2024 is seeing a wave of positive investor sentiment, with commodity hedge funds stepping back into the spotlight in the financial arena.
The second quarter of 2024 saw a continuation of the positive investor sentiment that has been prevalent since the start of the year. The quarter began with robust economic data in the US, dialling down expectations of central bank interest rate cuts; the possibility of rate hikes was even mooted. However, improvements in inflation data later in the quarter helped to ease these concerns.
Market & industry performance
Equity markets rallied, led by emerging markets (EM) and, to some extent, the US. The economic developments mentioned above continued to weigh on developed markets’ (DM) fixed income segments, which were flat-to-down. High-yield and EM debt were positive. Credit spreads, which reflect a healthy economy, remain tight and should also be the focus of investors going forward.
In terms of hedge funds, performances were positive for all strategies, barring systematic and merger arbitrage. The strongest performers were discretionary macro and corporate credit managers. Dispersion between markets and companies had a positive impact on these strategies.
Within equity L/S, our preference is for less directional low net exposure managers, as well as sector specialists that have been out of favour. For diversifying strategies, if rates begin to ease, this should be supportive for macro and EM through bond and FX opportunities. In relative value, a number of strategies are set to outperform cash in 2024.
Commodity hedge funds: increased interest, greater allocations
Commodity hedge funds have seen a resurgence in interest after a decade of relative inactivity. The correlation between prices and the number of dedicated hedge funds is notable, especially with nascent increased demand growth in China resulting in a significant rise in prices across the commodities complex.
The market ecosystem has been evolving, which improves the outlook for commodity speculation, but may also see some diminished merchant advantage. Factors such as the impact of the energy transition, new demand sources, and geopolitical issues have led to changing correlations and higher volatility across the commodities complex.
As a result, there has been an increase in allocations to commodity strategies from multiple sources. Multi-PM platforms have been increasing their allocations, and new standalone launches are attempting to take advantage of strong opportunities in specific markets.
What’s next?
The commodity opportunity set for hedge funds has improved significantly in the past few years. This is due to changes to the market ecosystem and the factors important for forecasting prices, all while the overall profitability of the space has improved dramatically. As these market changes are structural, the commodity hedge fund opportunity set is expected to remain attractive, acting as both a source of absolute returns and as a diversifier.
