The Cringeworthy Long Only Commodities Table

Here’s our monthly look at:

1. How the numerous commodity ETFs which have sprung onto the scene the past few years are tracking a simple strategy of just buying the December futures market of that commodity, under the theory that the ETF will have to roll their positions periodically throughout the year, and in doing so take on costs the simple strategy does not have.

2. How the passive investment strategy of being long commodities (either via futures or ETFs) compare to an active strategy going both long and short commodity markets via a professional commodity trading advisor (as tracked by the BarclayHedge Ag Trader Index).

(Performance as of 7/22/2015)

Copy of Commodity ETF Over/Under Performance 2015

CommodityFuturesETFDifference
Crude Oil$CL_F
-14.16%
$USO
-19.74%
-5.58%
Brent Oil$NBZ_F
-12.01%
$BNO
-12.91%
-0.90%
Natural Gas$NG_F
-5.12%
$UNG
-5.96%
-0.84%
Cocoa$CC_F
14.75%
$NIB
12,51%
-2.24%
Coffee$KC_F
-27.48%
$JO
-31.00%
-3.53%
Corn$ZC_F
-1.81%
$CORN
-6.98%
-5.18%
Cotton$CT_F
0.19%
$BAL
4.83%
4.65%
Live Cattle$LE_F
-3.75%
$CATL
-4.06%
-0.31%
Lean Hogs$LH_F
-13.97%
$HOGS
-23.41%
-9.44%
Sugar$SB_F
-27.38%
$CANE
-23.65%
3.73%
Soybeans$ZS_F
-1.00%
$SOYB
-4.53%
-3.52%
Wheat$ZW_F
-14.68%
$WEAT
-18.73%
-4.06%
Average-8.87%-11.14%-2.27%
Average without Hogs-10.02%-8.40%-1.62%
Commodity Index $DBC-11.06%
Long/Short Ag Trader CTAs1.02%

(Disclaimer: Past performance is not necessarily indicative of future results)
(Disclaimer: Sugar uses the October contract, Soybeans the November contract.)
Long/Short Ag Trader CTA = Barclayhedge Ag Traders Index

Why Can’t I Trade Chinese Stock Futures?

While we’ve all been setting our DVRs to record the Bachelorette, there’s been a bit of a blood bath going on over in China. A $3.2 Trillion loss in value blood bath.

This is just the type of outlier move managed futures would love, but there’s not one fund we’ve heard of that’s making hay on the drop. Bill Gross missing the move was more of a lack of pulling the trigger. Managed Futures didn’t pull the trigger, because they can’t. There’s nothing to pull.

Where’s the Shanghai Composite futures?

Futures contracts have always been a way of doing business in the states, where farmers could hedge their crop for the season. Futures contracts for equity markets were born many decades later in the 90’s. When you put that all into context, it would make sense that the Shanghai Stock Exchange only just created their first equity futures contract back in 2010. Then in February, Options Trading was introduced, and as early as April, new contacts were introduced, via the Financial Times that would run off of the large-cap CSI 300 index.

“Exactly five years after the launch of mainland China’s first equity futures contract, based on the large-cap CSI 300 index, new futures products based on the CSI 500 and Shanghai Stock Exchange 50 began trading on Shanghai’s China Financial Futures Exchange. The move follows February’s rollout of equity options based on the SSE 50.”

Why this is relevant is because, these futures contracts (first the CSI 500) are the contracts that opened up the possibility of short selling.

“CSI 300 futures were considered a breakthrough in 2010 because they expanded investors’ ability to conduct short selling. Today, they are among the most liquid products in China’s equity market. However, the CSI 300 is made up exclusively of large-cap shares, especially banks and state-owned industrial conglomerates.”

China CSI 300 Futures Market(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: FT

And more recently, the newly launched contracts.

 “The two new futures products launched on Thursday greatly expand the short selling toolkit, especially the CSI 500 product, whose index is composed entirely of medium and small-cap stocks. Now, analysts are warning that the launch of small cap-focused futures products could spark a correction in some high-flying share prices.”

But given the recent plunge in the markets, China is regulating how much you can buy or sell per day, via Bloomberg.

Investors can buy or sell at most 1,200 new contracts linked to the CSI 500 Index per day starting Tuesday, the China Financial Futures Exchange said in a statement on its official microblog on Monday night. The CSI 500 futures contract for July delivery plunged 8.6 percent at the close. The underlying index slumped 6.5 percent, extending losses to 41 percent since the June peak.

China’s state run media is blaming rumors and foreign investors for the sell off, but it’s not all that easy to be one of those foreign investors. Why? Here’s comes the bureaucracy. First, the Hong Kong-Shanghai Stock Connect programme (which is the regulatory group for alternatives) are turning there noses to them. Second, you also have to be a QFII, a Qualified Foreign Institutional Investor. To get that title, one must have a combined quota of 80 Billion U.S. dollars.

On top of this, there are different qualifications one must meet in order to be a QFII.  For example, a fund management company must have at least 5 years of experience and 5 billion dollars in equity assets in order to invest in Chinese futures.  This is a large barrier for an investment management firm to get over and thus making it nearly impossible for Americans to investment in Chinese futures.

Not to mention – the volatility of that market would leave only a small, small allocation to the market, even if it were available for most systematic managers.  Maybe your next fortune cookie will say “Better luck buying futures elsewhere.”

Futures vs ETFs 4 Months In

If you haven’t seen the old ‘dead cat bounce’ in Crude Oil recently, we’re looking at a 50% or so rebound from around $40 up to $60, making our “How to Play a Bounce in Oil (Hint: Not $USO)” post quite on point, both from a timing standpoint, and from the $USO pan – with December WTI now up 6.09% YTD while the $USO ETF is only up 0.74% {Disclaimer: Past performance is not necessarily indicative of future results}.  Whether this bounce keeps bouncing or not, here’s our monthly look at:

1. How the numerous commodity ETFs which have sprung onto the scene the past few years are tracking a simple strategy of just buying the December futures market of that commodity, under the theory that the ETF will have to roll their positions periodically throughout the year, and in doing so take on costs the simple strategy does not have.

2. How the passive investment strategy of being long commodities (either via futures or ETFs) compare to an active strategy going both long and short commodity markets via a professional commodity trading advisor (as tracked by the BarclayHedge Ag Trader Index).

(Performance as of 4/30/2015)

Commodity ETF Over/Under Performance 2015

CommodityFuturesETFDifference
Crude Oil$CL_F
6.09%
$USO
0.74%
-5.35%
Brent Oil$NBZ_F
6.48%
$BNO
7.05%
0.57%
Natural Gas$NG_F
-7.25%
$UNG
-8.87%
-1.62%
Cocoa$CC_F
2.07%
$NIB
1.01%
-1.05%
Coffee$KC_F
-18.73%
$JO
-22.21%
-3.48%
Corn$ZC_F
-8.93%
$CORN
-11.67%
-2.74%
Cotton$CT_F
3.45%
$BAL
11.61%
8.16%
Live Cattle$LE_F
-2.73%
$CATL
-3.04%
-0.31%
Lean Hogs$LH_F
-5.31%
$HOGS
-20.06%
-14.75%
Sugar$SB_F
-13.21%
$CANE
-12.84%
0.37%
Soybeans$ZS_F
-5.30%
$SOYB
-5.73%
-0.43%
Wheat$ZW_F
-18.29%
$WEAT
-20.30%
-2.02%
Average-7.03%-5.14%-1.89%
Average without Hogs-5.84%-5.12%-0.72%
Commodity Index $DBC-0.87%
Long/Short Ag Trader CTAs-0.02%

(Disclaimer: Past performance is not necessarily indicative of future results)
(Disclaimer: Sugar uses the October contract, Soybeans the November contract.)
Long/Short Ag Trader CTA = Barclayhedge Ag Traders Index

Be Careful Predicting a Forecast

We’re only days away from April, and although it still feels a little winter-like in Chicago, planting season is upon us. Tomorrow, the USDA will release a crop report, forecasting how much Corn, Wheat, Soybeans, and so on will be planted in this fine country this time around.  And the analysts are already out with their predictions on the forecasts.  There’s a joke in there somewhere, ‘what do you call a prediction of a forecast…. wrong’. We’re not sure who these “analysts” are, but they’re predicting that the USDA will predict (you may have to read that twice) a larger planting season for one crop in particular… Soybeans.

“Analysts on average expect soybean acreage to rise 3% from last year to 85.9 million acres, while corn will fall 2% to 88.7 million acres, according to a survey by The Wall Street Journal.”

“Farmers are turning to soybeans for a few reasons: Prices have fallen less sharply than for corn, demand has been strong and producing the oilseeds costs less thanks to lower seed prices and less need for fertilizer.”

Farmers say the crop is better for business (at the moment), but there are downsides to these positions.

“But sowing more soybeans—used to make everything from animal feed to salad dressing—has its own downside. Many traders and investors are betting that further production increases will trigger steep declines in soybean futures, potentially pushing the $35 billion market to lows not seen since 2009.”

The question remains, that if more soybeans are in fact planted, could we see Soybean prices fall faster and deeper than what the markets experienced last year? Some analysts are predicting Soybeans to drop below $9 a bushel. Here’s the latest look at Soybeans by acres planted, front month contract prices, and net positions over the past 1.5 years.

Wall Street Journal Soybeans(Disclaimer: Past performance is not necessarily indicative of future results)

There’s also a little of a ‘chicken or the egg’ debate here, because what happens if the USDA does come out and forecast record breaking acres planted in Soybeans, forcing prices lower, which in turn causes farmer’s not to plant it, thereby invalidating the ‘forecast’.  Welcome to the exciting and often wrong world of predicting a forecast – we’ve touched before on how the USDA crop reports aren’t all that accurate (and here).  And in today’s age of twitter, live updates to your phone, and folks like this doing a Pro Farmer Midwest Crop Tour, the USDA has to come up with a better way to accurately report crop data.

Meanwhile, Alternatives folks (specifically those who ply their trade in such Agriculture markets) don’t care all that much if Soybeans drop to $5 a bushel. They just care that the move from $9 to $5 is consistent enough to lock in the downward trend. We’ll see what happens tomorrow.

Different Exposure, Different Price

Long Only Commodities as an asset class has been plummeting since around April last year, and the downtrend continues into 2015. The average move of commodity futures in January came out to be -5.02%, compared to ETFs -7.54%, with ETFs underperforming the futures markets they supposedly track by 2.52% {Past performance is not necessarily indicative of future results}.

Here’s our monthly look at:

1. How the numerous commodity ETFs which have sprung onto the scene the past few years are tracking a simple strategy of just buying the December futures market of that commodity, under the theory that the ETF will have to roll their positions periodically throughout the year, and in doing so take on costs the simple strategy does not have.

2. How the passive investment strategy of being long commodities (either via futures or ETFs) compare to an active strategy going both long and short commodity markets via a professional commodity trading advisor (as tracked by the BarclayHedge Ag Trader Index).

(Data as of January 30th, 2015)

Commodity ETF Over/Under Performance 2015

CommodityFuturesETFDifference
Crude Oil$CL_F
-4.47%
$USO
-12.48%
-8.00%
Brent Oil$NBZ_F
-6.45%
$BNO
-10.57%
-4.12%
Natural Gas$NG_F
-6.63%
$UNG
-7.45%
-0.82%
Cocoa$CC_F
-6.02%
$NIB
-8.45%
-2.43%
Coffee$KC_F
-2.13%
$JO
-3.21%
-0.80%
Corn$ZC_F
-4.85%
$CORN
-6.27%
-1.42%
Cotton$CT_F
-2.53%
$BAL
-1.99%
0.54%
Live Cattle$LE_F
-4.20%
$CATL
-8.08%
-3.88%
Lean Hogs$LH_F
-4.21%
$HOGS
-13.59%
-9.39%
Sugar$SB_F
0.83%
$CANE
1.77%
0.94%
Soybeans$ZS_F
-5.96%
$SOYB
-6.17%
-0.21%
Wheat$ZW_F
-13.41%
$WEAT
-14.02%
-0.62%
Average-5.02%-7.54%-2.52%
Commodity Index $DBC-5.69%
Long/Short Ag Trader CTAs0.61%

(Disclaimer: Past performance is not necessarily indicative of future results)
(Disclaimer: Sugar uses the October contract, Soybeans the November contract.)
Long/Short Ag Trader CTA = Barclayhedge Ag Traders Index