Winner: Best energy or commodities hedge fund

The Krom River Commodity Fund is a discretionary, multi-commodity fund employing volatility, directional and spreads/arbitrage strategies across multiple markets. This is to avoid correlation risk before investing in commodities via exchange-traded futures and options.

The investment team uses a combination of macro and fundamental research to generate and test theses and technical analysis to confirm views and determine timing. The fund trades 20 to 30 commodities in base and precious metals, agricultural, softs and energy markets.

Investment ideas are sourced from publicly available information and specialist research companies. According to Christopher Brodie, the fund’s portfolio manager, the investment team then considers the supply and demand balance and inventories, looking for commodities that are about to undergo inventory stress or exiting inventory stress.

The core of the team composed of risk manager Itay Simkin and Brodie who have known each other for 20 years. While Brodie comes up with the trading ideas, Simkin ensures Brodie’s decisions are not exposed to too much or too little risk. Working alongside Brodie and Simkin are two traders and two researchers.

Brodie previously worked as a base metals trader and while this experience has been useful for him, it does not necessarily help with the unpredictability of the commodities market. “The one base metal that I never made money on is aluminium. Since setting up the fund, the only base metal to have actually shown a profit is aluminium. If you look at the fund, you would think I was an oil and grain trader,” he comments wryly.

The only striking consistency Brodie has observed in the fund’s portfolio is that any commodities the fund has lost money in lost less than 1.5%. The ones the fund made money in have averaged between 4% and 16%. 

At present grains such as corn, wheat and rice are interesting to Brodie because reduced inventories are creating high demand and declining supply. “We needed perfect weather to have even a modest build in inventory and so far we’ve had terrible weather. We might well end up with a closed-border system when the exporting countries stop exporting,” Brodie comments.

Investing in corn in particular could pay off as Brodie reckons the published figures for corn inventories worldwide are inflated. Wheat production is struggling in Western Europe, Canada and the US, according to Brodie.

Energy is another market Brodie has been following closely due to the strained spare crude oil pumping capacity as a result of global economic growth, particularly in emerging markets.

“This will continue and we will end up with rationing through price. Essentially we are not growing enough. We will have to abandon ethanol production and tolerate much higher energy prices,” he warns.

The investment team has a disciplined pre-planned portfolio construction and risk management approach trading liquid, exchange-listed instruments to avoid counterparty and valuation risks. The portfolio is further protected through its diversification across 30 commodity markets. This helps the managers cope with such high levels of volatility.

“We are trading to avoid the classic mistakes which are over-leverage and over-concentration. Commodities can rise or fall 20% in a day and do so on a regular basis. If you have three times leverage, your P&L in one day could be 60%. I don’t want to wake up one morning and find my P&L has moved 18% overnight,” Brodie explains.

Target returns are 15% a year. This means the fund needs to achieve just over 1% of returns every month.

Brodie believes his fund stands out because “we take smaller positions but we produce the numbers, and everybody scratches their heads saying ‘how did you do that?’”

The majority of investors into the fund are funds of hedge funds (FoHFs) although institutional, family office and high net worth individuals (HNWIs) are also key clients.

Fund facts
Full name of fund: Krom River Commodity Fund
Name of portfolio manager: Christopher Brodie
Name of investment/management company: Krom River Investment Management (Cayman)
Contact information: Roderick Hogarth, Krom River Trading, Neuhofstrasse 3d
CH-6340 Baar, Switzerland (+41 41 544 55 15 or +41 41 544  55 00; rh@kromriver.com)
Launch date: July 1, 2006
Assets under management: $140 million (fund); $700 million (strategy) (December 31, 2010)
Net cumulative performance since inception: 95.55%
Annualised return: 14.88%
Annualised volatility: 10.58%
Sharpe ratio: 1.44
Strategy: directional commodity; spreads/arbitrages commodity; volatility commodity
Share classes: US dollar, euro, Swiss franc
Administrator: Citco Fund Services
Auditor: KPMG
Custodian: BNY Mellon
Prime broker: JP Morgan
Legal counsel: Walkers (Cayman)
Domicile: Cayman Islands
Management fee: 2%
Performance fee: 20%
Minimum investment: €/Sfr 1 million
Lock-in: 12 month soft lock (3%)
Redemption/liquidity terms: monthly with 30 days’ notice