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Buying Highbridge Dynamic Commodity (HDCCX) today in taxable...

...(4% of total portfolio) -- anyone want to give me a couple of last minute caveats before I take the commodities plunge?


  • I would just suggest that you consider another option, that being managed futures, and not just long-only commodities. When commodities tanked in 2008, long funds really took it on the chin, while managed futures funds ended the year with gains. I am not saying that HDCCX will behave in any specific way should a similar event occur, but I would want to maybe hedge my commodity bet. The managers could be the next best thing since rolled toilet paper, but the fact that they "may reduce exposure to commodities in certain environments" means that they likely cannot go very short at all. In 2008, PIMCO Commodity Real Return lost more than 43% with a strategy that is not all that unlike HDCCX. So tread carefully. With 4%, you are probably ok, but I would be sure to capture all the gains, regularly, as the commodity bull market continues...just in case.
  • edited April 2011
    Thanks, Bob.

    How would a managed futures approach differ from the derivatives approach PIMCO and HDCCX use?

    You note that HDCCX also has the ability to short and in the HDCCX case, it can do so quite substantially (and uses this tool quite frequently, moreso it appears, than the PIMCO product -- right now its short energy/oil). Its not clear to me how a managed futures strategy improves over shorting?

    When I think managed futures, I think Rydex. Anyone else you like in that space?

  • HDCCX is long-biased, but has the ability to short. It is actively managed and presents itself as heavily focused on controlling risk, despite the fact that it can use significant leverage. I definitely see it as a more flexible fund than the Pimco fund, although both funds certainly do have the potential for significant volatility. The Highbridge fund will likely have periods of underperformance and outperformance versus the Pimco fund.

    The Rydex Long/Short Commodities fund (RYLFX) is another fund I use that can go long/short, but it is only repositioned once per month; it is not actively managed. There are some new funds that use managed futures in an active manner, such as Altegris Managed Futures (which I believe farms out to mananged futures managers), but their track record is mixed (so far.) RYLFX is a supporting player; I would never use it as a core commodity play.

    As for managed futures on a larger scale, the AQR fund looks good, but the issue with that is that the minimum investment is sky-high.

    There is an excellent (excellent) discussion of both Rydex funds at this link:

    The issue with managed futures is a consistent trend within the markets followed; the Rydex Managed Futures fund did well in 2009, but not in 2009/2010.) The more dynamic Rydex Long/Short Commodities (which only follows commodities vs. commodities + financials for the Managed Futures fund) did better. Rydex is coming out with Rydex Managed Futures Alpha sometime soon, which would appear to be a more actively managed version of Rydex Managed Futures.

    Still, I think the question comes down to how to play commodities. Managed Futures funds are a very nice diversifier, but if you are looking for a straight-up pure play on commodities that is mostly long (and you do get the significant risks involved given past commodity fund performance, which I think you definitely do), then the Highbridge fund, or the Pimco fund (with its consistent large dividends/distributions) would appear to be the two main choices in my opinion.
  • Hey, Scott thanks.

    I guess what I should have asked (and am looking for in part), is what is the difference between going a derivatives route vs. a managed futures route (aren't futures also derivative contracts)?

    Cheers -- and thanks again.
  • edited April 2011
    Managed Futures funds are generally positioned as "all-weather" vehicles and are more long/short funds. The only issue with managed futures funds (especially more basic funds like the Rydex Managed Futures fund) is that they do best with a consistent trend in the investments they follow. Rydex MF did well in 2008, then not so good in 2009/2010. Everyone who piled in after the fund's impressive performance in 2008 (+8%) was not so pleased when the fund did not do well the next year.

    The more complex retail funds (the Rydex Long/Short commodity fund, which is a more aggressive managed futures fund) have more complex (not hedge-fund like, but more evolved than the initial Rydex Managed Futures fund) mechanisms to follow trends, but are still vulnerable to volatility and with passively managed vehicles like the Rydex funds, limited repositioning (which can be an issue, given geopolitical impact and other issues with commodities. As for long-biased funds, while commodities have ran a lot, the Highbridge fund's ability to emphasize certain sectors if events warrant doing so is - I think - appealing. It depends on whether or not the managers can effectively take advantage of situations as they present themselves, but the fund gives them at least the *potential* to do so. Again, a good deal is riding upon the managers in the case of the Highbridge fund. The Pimco fund cannot short commodities. It's long-only and if it's a good year, it's a good year, if it's not a good year for commodities, well...I guess at least you have the reinvested distributions for the time being. The Highbridge fund, still being long-biased, will definitely lose on a bad commodity year, but the hope is not to the same degree as something like the Pimco fund.

    The actively managed AQR Managed Futures fund is more interesting (although that is a broad, multi-asset managed futures fund, not just commodities), as are some of the newer vehicles (the Altegris fund, which is still very new). As I've noted in other posts, I'd love to see way more complex investments/strategies be made available to US investors, but I doubt it will be happening soon, given all the regulatory hassle.

    These managed futures funds are more limited risk, and more limited reward, although the "goal" (and I emphasize "goal"; it depends on how well the fund follows trends and - I think - its capability/flexibility in being able to do so) is consistent, small gains (as is the goal with sometihng like Merger Arbitrage). In other words, singles year-after-year, even in a time period like 2008.

    However, I think that's tough with basic funds like Rydex Managed Futures (RYMFX). You are seeing "second generation" and "third generation" Managed Futures vehicles for retail investors (like the AQR fund), but these funds still have periods where they underperform the index. They will also have periods where they outperform the index and are generally not heavily correlated to broad market movements. Again though, I think my concern with something like Rydex Managed Futures is, given the increasingly fast nature of the markets today, it's great that retail investors are offered managed futures funds, but is something as basic as the Rydex fund like a Fisher Price Managed Futures fund? I'm just not sure how well the more basic initial managed futures mutual funds hold up over the next decade and would look at the more 'second and third generation' funds if I were to be interested in the strategy.

    Natixis has some futures funds (such as Managed Futures) managed by the very well-regarded Andrew Lo, but the funds are pricey in terms of expense ratio.

    I like managed futures as a diversifier quite a bit, but if I'm looking for a commodity play, something like the Rydex Long/Short fund is not going to be a core holding, but instead a supporting player.

  • Thanks again, Scott; and thanks for putting HDCCX on my radar screen.
  • Happy to help! Hope it continues to do well. There could certainly be sigificant dips in commodities, but between monetary policy and supply issues (continued development over ag land, increasing lack of fresh water, populaton growth) that will likely increase over time, I'll continue to own commodities, although the % (sort of a loose definition of overweight, neutral) will vary.
  • Oh, I'm not looking at a commodities position as a cure to all ills. I only want something as a hedge, and as a bit of a speculative play. In taxable I'm holding FESGX (First Eagle Global), IVWCX (IVA Worldwide), and a bunch of large-cap dividend stocks, plus OAKEX (Oakmark Intl Small Cap), DODFX (Dodge and Cox International Stock), and UMESX (Columbia Energy and Resources), as well as about 10% cash. If oil continues to go up, I'll trim UMESX and increase HDCCX.

    Longer term, I'm looking at rotating out of DODFX and perhaps into the new Ivy International Opport. I like FESGX and IVWCX as core since they can hold metals (I think at one point First Eagle held ag commodities ETFs) and do a good job at risk management. That, and a few large cap dividend payers are my core. I've done well with BX (Blackstone) over the past year (wish I had bought more), and may sell my shares of JPM and buy more BX or otherwise KKR, LAZ, or IVZ once I break even (am underwater on JPM).

    Will continue to look into the managed futures route; want to learn more about these funds/strategies.
  • edited April 2011
    In terms of a hedge against inflation, HDCCX is a good choice. In terms of a hedge against existing commodity positions, I think that gets a little tougher, given a number of factors, including geopolitical risk and the fact that, in this market, the expected correlations (this goes up, this then likely goes down) do not play out as expected as often.

    Pimco does provide a commodity short fund, but I guess I'd rather just scale back commodity holdings rather than short against them. Maybe I'm crazy, but I'd rather bet on continued inflation and get that wrong and have to correct for that than bet on deflation and then get that wrong and have to correct for inflation.

    I do own Bluecrest Allblue (BABS) in the London market - while past results do not guarantee future performance, that fund lost 1% in 2008, then went up 53% in 2009 (NAV-wise, it was up 10% in 2007, 12% in 2008, then 21% in 2009.) A portion of that fund is the Bluecrest Bluetrend fund, which is a managed futures strategy. As I've noted before though, an investment in that (or other London market funds) is exposure to the fluctuations of the GBP. You can read more about Bluecrest here:

    I do like the First Eagle and IVA Funds and would own those if looking for a value-oriented worldwide play. The new Ivy fund also looks interesting, as well - I do like Ivy Asset Strategy, although I wish there were more great funds in that space.

  • Scott, your comments are well taken. The managed futures investments do indeed do well when there is a consistent direction in the futures marekts. As you pointed out, 2009 was all over the place, and the first 6 months of 2010 even more so. Then things sorted themselves out, and the managed futures funds took off. Since most of these funds adjust monthly to their underlying commodity indexes, it is possible for investors to get whipsawed when futures prices swing widely from month to month.

    I think there are really two discussions here. The first, at least for me, is one of lowering volatility in a bear market. And history has shown that managed futures do exactly that. When the market is bullish, they will also do ok, but probably not as good as long-only commodity funds. They struggle when the commodity futures markets have no direction on a short-term basis. In addition to Rydex, one to consider is Direxion (DXCTX). If you look at the history of this fund, it is a great example of what I outlined.

    The second is one of participating in what some believe is a long-term commodity bull market. I think HDCCX could be an ok option for investors wanting that kind of action. Another option, and certainly a lower expense/cost one, would be to use one of the many ETFs out there, such as DBC (PowerShares). I try to ignore propaganda the fund companies trot out that shows how their new fund "would have performed" in the past using their current strategy. And I would want to see just how active HDCCX really is over the next 6-12 months. It might give you a clue as to what will happen if there is some kind of real problem in the commodities markets down the road.

    Thanks again to Scott.
  • Scott, Actually the AQR fund is available NTF at fidelity for a min of $5,000. Not a small amount considering that would be your entire contribution for the year but not exactly 1 mil either.
  • BobC -- thanks for the comments. I'd consider ETFs by the size of my portfolio makes them less than ideal due to the transaction costs. With a mutual fund its very easy to dollar cost average in (and out). The extra expenses I'd pay going with, say, HDCCX would more than make up for the transaction costs I'd pay going with an ETF.
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  • edited April 2011
    Excellent comments from Bob C.

    I do like the Rydex Long/Short Commodity fund in the managed futures space due to some added features beyond the monthly rebalancing (to quote from the interview: "RH: The fund has a reversion test to avoid over-bought or over-sold situations and a volatility cap that scales back positions when historical volatility is high. The positions are equally weighted. The 14 commodity futures that are components of the index are highly liquid instruments. Commodities that are thinly traded are not part of the index.
    Gross exposure typically ranges from 70% to 130%. It could go as low as zero if no commodity market trended or as high as 200% in the extreme case of seven commodities trending downwards and seven trending upwards. But those situations are very rare. If there is no consistent trend, we won’t have a position is that market. ") Additionally, the S & P CTI (the commodity portion of the DTI that the Rydex Managed Futures fund follows) is "sector-specific", versus the JP Morgan C-IGAR (which is what the rydex l/s fund uses), which is commodity-specific ("The two indexes are different. For instance, each commodity has a separate signal in the JP Morgan Core Commodity-Investable Index whereas S&P DTI uses sector-level signals. Also, the commodity fund can short energy futures.")

    I'm not an aggressive investor for my age, but do give space to focus on what can certainly be viewed as "aggressive themes" - commodities being one and emerging markets being the other. Managed futures is certainly an excellent diversifier and dampens volatility, but can run into years of disappointing returns like 2009. I think that's why these funds SHOULD be owned, but not to a large degree - Cliff Asness offered an excellent discussion on managed futures when the AQR fund was launched on CNBC, and noted that they are a diversifier for a portion of your portfolio, not a core holding. Again though, I think more recent generations of the managed futures funds (such as the AQR fund) have the capacity to perform more consistently over good times and bad.

    Managed Futures is a good fit, Arbitrage is a good fit and there are other alternative strategies that can be explored.

    Overall, I have a handful of rather aggressive stocks, some aggressive EM mutual funds and the commodity funds, but also have fairly large positions in quieter funds such as Pimco Unconstrained, Pimco All Authority, Bluecrest Allblue, a couple of slight ultrashorts and others, such as Arbitrage Event-Driven. Bob C has discussed some good alternative offerings in the past, such as the Eaton Vance Global Macro fund.

    I love alternative funds, so they continue to play a large part. I still own the bizarre Direxion Global Long/Short IPO fund.

    I view HDCCX as something of another evolution in commodity mutual funds. That doesn't mean it is foolproof or risk-free or any of those things, certainly, but simply that it has a few more tools to work with than most. I don't believe there's anything quite like it, as most commodity mutual funds that I'm aware of are passively managed and long-only. But again, it falls upon the management to be able to take advantage of the added flexibility and especially the use of leverage. I like USCI and GCC as commodity ETFs, but the former trades in a volatile fashion and both are passively managed, but I do think they are excellent examples of commodity ETFs.

    Thanks to chris regarding the AQR availability at Fido. I have AQR International and AQR Risk Parity, but would consider AQR Managed Futures if space opened up.
  • Maurice,
    The ticker symbol for AQR Managed Futures CL N is AQMNX. With the exception of AQR Risk Parity, which Scott mentioned in other posts on Fundalarm and you can get at low min at ETrade, most AQR funds you can get for lower minimums at Fidelity NTF. That is the platform I use. Best of Luck.
  • Risk Parity, International, Global and Diversified Arbitrage are NTF/No minimum at Etrade for IRA's (non-IRAs are $5K for the other 3 or $1M for Risk Parity; Managed Futures is actually $5K NTF at Etrade for either/or; the rest (the momentum funds) are $1M+.
  • edited April 2011
    And additionally, I'm not saying that the AQR funds are the bestest funds ever, but I think they're very good and in terms of momentum and alternatives, I have a lot of confidence in Cliff Asness and company over the long haul.
  • So Scott, if you don't mind my asking, how exactly is your retirement portfolio structured. Are you more than 10% invested in alternatives, and how did you decide on that particular allocation.

  • edited April 2011
    My allocation changes frequently and one of my goals for the next few years is to be a little less active. However, my portfolio will likely not be streamlined any time soon - there are quite a few small positions and some small to the point of considered as "taste tests" (Forward L/S Credit Analysis). I definitely do not run a concentrated portfolio (emphasis on that part), or follow traditional allocation strategies (not that there's anything wrong with either.)

    Alternatives as a part of the overall portfolio (IRA + taxable) are likely, depending on what qualifies as "alternatives" (I wouldn't include something like AQR Risk Parity, as I'd call that more of an allocation fund) are probably at 15-17% and possibly a bit higher.

    Alternatives (as well as a few minor ultrashort hedges) serve to dampen volatility from the more (potentially) volatile aspects of the portfolio, such as invididual (both foreign and US) stocks, EM funds and commodity funds.

    I think for me investing largely revolves around core long-term themes (commodities, EM and some smaller themes at times, such as infrastructure and one or two other minor ones), along with a portion of more generalized investments and support/alternatives. The allocation to "core themes" may be reduced at times and then that money heads to more generalized investments and if there was a time when there were no larger themes of interest, more money would be in generalized investments.

    It's an evolving process and it's far from perfect, but the goal is to learn (from both the positive and negative) and try something different.

  • Scott, BobC, others:

    Just had a chat with JPMorgan funds today re: this product. JPM describes it as a "trading strategy" fund, not an index-linked product. It has the latitude to adjust the portfolio daily, weekly, monthly, as necessary. It is not a passive or near-passive product. Dividends paid quarterly (if they're not absorbed in trading costs).

    Anyway, FYI. I'm establishing a position with the "speculative" portion of my taxable portfolio, going in slowly. May complement this holding with the PIMCO holding (which has income generation as part of its strategy).

  • Thank you for the notes regarding the fund.:-)

    This ("Dividends paid quarterly (if they're not absorbed in trading costs.") is probably why I'm still waiting for a quarterly dividend to happen.
  • Just bought small portion 20 minutes ago. Its more speculative than what I thought, so I'll re-think my risk tolerance and maybe balance it with PIMCO or something else.

  • edited April 2011
    I have HDCCX, GCC, Pimco and RYLFX. Will probably dump GCC soon though and just go with HDCCX, Pimco and RYLFX.
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