LONDON (Reuters) - Asset manager Man Group aims to attract new institutional and wealthy retail clients with a commodity fund that uses hedge fund techniques and computer models, but in a traditional long-only format.
A wave of investment has entered commodities over the past decade from pension funds and other investors seeking diversification from equities and fixed income, but much of it is in passive index funds which underperform in weak markets such as last year.
Commodity hedge funds that are able to take long and short positions are more flexible in bear markets, but do not provide an inflation hedge, said Scott Kerson, who is managing the recently launched fund.
"We're bringing a systematic hedge fund mindset to the long-only space in commodities," Kerson, formerly with hedge funds Ospraie and Amaranth, told Reuters in an interview.
The Man Commodities Fund will use proprietary computer algorithms to trade 25 commodity futures contracts, but unlike some "black box" operations will also allow human intervention.
"We have developed a series of models on computers, which are non-discretionary, but derived from a research process that is heavily dependent on the humans behind it," said Kerson, who joined Man last summer.
"How those models are applied and whether they continue to be appropriate for the current market environment will be subject to human oversight."
The fund is part of a push by the world's biggest listed hedge fund firm to develop a range of new quantitative products.
The fund will be included in Man's (EMG.L) one-year old Systematic Strategies unit (MSS), which is being run by Sandy Rattray, who co-developed the VIX .VIX volatility index, also known as the "fear index", widely used to measure investors' perception of risk.
SEEK TO FILL GAP
The new product is seeking to fill a gap in a market to give investors greater choice.
While the "absolute return" hedge funds may provide strong performance, they do not provide the beta exposure to commodities as an asset class. Beta refers to return generated from a portfolio that can be attributed to overall market returns rather than from an individual stock or commodity.
"In a hedge fund format, you don't have that beta and you don't have that hedge against inflation shocks that we felt people wanted," Rattray said.
While passive funds have scant ability to guard against market downturns, the new fund can withdraw cash from markets instead of going short like hedge funds.
"Our fund can become fairly significantly underinvested to the extent that our momentum models in particular are detecting a negative trend in the commodity markets," he added.
At the moment, the fund is positive about oil and precious metals and less friendly towards U.S. natural gas and agricultural markets.
It has begun trading with a $50 million (32 million pound) seed investment from the group and hopes to attract single-digit hundreds of millions of dollars in assets this year. In the long run, it will have capacity for about $5 billion.
The fund is under the Ucits format, a European regulatory framework that allows funds to be sold in any European Union country.
That will allow the fund to be marketed to high net-worth retail investors in additional to a core audience of pension funds and other institutions.
The Man Group has a long history in commodities after being founded in 1783 as a barrel maker and sugar cooperage business and later becoming a commodity broker before its transformation into a hedge fund group.
Man already trades commodities in its flagship AHL futures fund and its Man Commodity Strategies fund of funds.
MSS, which was formed in January 2011, has $1 billion of assets under management in two existing funds. The Man GLG Europe Plus fund is a long-only equities fund drawing on the best broker ideas, and TailProtect is a long-only volatility fund to provide tail risk protection.
If the new commodity fund is successful, MSS may consider launching other commodity-focused funds.
(Additional reporting by Randy Fabi; Editing by Hans-Juergen Peters)
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