An increase in stock market uncertainty post-Brexit and an uptick in interest in commodity hedge funds after a multi-year bear market prompts Reda Bedjaoui, CEO of Redbed Investments LLE and recognized thought leader on multi-sector international investing, to review key characteristics of trading styles in commodity sub-sectors for institutional investors seeking more active opportunities rather than passive strategies.
Hedge Fund Research Institute, HFRI, estimates commodity hedge funds represent less than 1% of total hedge fund industry assets as of 2015. However, after seeing years of net outflows, 2015 saw modest inflows with several new funds already launched in 2016. In addition, Barclays Annual Investor Survey is projecting a 5% rise in capital into commodity hedge funds this year. Reda Bedjaoui sees understanding the underlying strategy and style in instruments traded and in sub-sector focus as a way to play relative value relationships and recommends investors look at funds capitalizing on mispricings due to a supply and demand imbalance in the markets traded.
According to Bedjaoui, there are several key characteristics to watch for when comparing trading styles between funds in commodity sub-sectors. Short or long positions based on time spreads – the shape of the forward curve, either in contango or backwardation; geographical – long one geographically listed contract against another within the same commodity; cross exchange – either short or long on the same commodity across different exchanges where price inefficiencies can be common; quality – the price relationship between variations in quality of the same commodity; margins – playing the ratio of input and output costs. Reda Bedjaoui also notes specifically in the energy market, crack arbitrage – exploiting price relationships between crude oil and its refined products; diffs – short and long stands on the price relationship between varying grades of a product versus the benchmark; in metals, historical ratios – trading on non-fundamental price distortions; or in agriculture, substitution – positions based on commodities with similar physical characteristics that can be substituted for another.
While individual commodity prices can be extremely volatile and quickly rise and fall with supply and demand, inflation, exchange rates, and the general health of the economy, Bedjaoui believes we are approaching a good re-entry point into certain commodity sub-sectors, and by recognizing the opportunities and strategies that capitalize on relative value relationships and actively analyzing the market using these trading styles, investors can see excellent returns.
For more than a decade, Reda Bedjaoui has anticipated trends in commodities trading. His expertise in corporate governance, risk management, and regulatory compliance has enabled him to manage commodity risk exposure and provide governance guidance to a number of international companies. Mr. Bedjaoui’s insights grow out of his command of international law, as well as his global business and real estate successes. Raised in Paris, France, Mr. Bedjaoui studied at Université de Montréal, where he received a Bachelor in Law degree. He furthered his education at Hague Academy of International Law in the Netherlands, and then was admitted to the Bar of Quebec, Canada (Montreal Section) in 1995. He honed his practice of commercial law, corporate law, and international arbitration in positions at recognized law firms in both Montreal and Paris.
Reda Bedjaoui — Outlines Importance of Corporate Governance: http://finance.yahoo.com/news/reda-bedjaoui-outlines-importance-corporate-041125094.html
Reda Bedjaoui — Attended NAAIM 2016 Uncommon Knowledge Conference: http://www.streetinsider.com/Press+Releases/Reda+Bedjaoui+–+Attended+NAAIM+2016+Uncommon+Knowledge+Conference/11665764.html