DNA of a Manager Search: Commodities

DNA of a Manager Search: Commodities

This paper – part of the DNA of a Manager Search series – explores one pension fund’s hunt for an enhanced commodity overlay manager. We hope that it will give peers greater insight on the different strategies and implementation structures available.



Enhanced commodity overlays offer the prospect of adding value while maintaining some “passive-like” qualities: a fully systematic investment approach, total transparency of process and positions, liquidity and low cost (c.15bps more than pure passive).

There are three major levers that managers can employ in their efforts to “beat the index”: contract selection, backwardation and pre-roll. The returns from backwardation and pre-roll have been somewhat muted lately but still represent a notable uncorrelated return stream.

There are two routes for implementation: fund-type structures (asset managers and boutiques) and OTC swap-based solutions (banks and some index providers). Swap-based solutions tend to be slightly less expensive on an all-in basis.



After a decade of poor performance, many commentators delivered a more bullish outlook for commodities during the first quarter. Such predictions are buoyed by global economic growth and some helpful market dynamics, such as the reduction in contango (page 5).

Several large investors have signalled their intention to enter this often-controversial space, drawn not only by the investment outlook but by the sector’s inflation hedging characteristics.

At bfinance, we have observed notable changes in client demand. Investors with passive commodity exposures are showing greater interest in enhanced (active) systematic commodity investing, although to date we have not seen a resurgence of appetite for pure-play commodity hedge funds. We are also seeing strong appetite for Alternative Risk Premia, CTA and Systematic Macro strategies, many of which also involve commodity investments with a similarly systematic approach.

Important Notices

This commentary is for institutional investors classified as Professional Clients as per FCA handbook rules COBS 3.5R. It does not constitute investment research, a financial promotion or a recommendation of any instrument, strategy or provider. The accuracy of information obtained from third parties has not been independently verified. Opinions not guarantees: the findings and opinions expressed herein are the intellectual property of bfinance and are subject to change; they are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. The value of investments can go down as well as up.