As commodity investing grew, publicly traded commodity funds became more common. A few commodity trading advisors have branched out to managing public funds in addition to private vehicles. What effect does this have on a CTA?
Tim Pickering, portfolio manager at Calgary-based Auspice Capital Advisors Ltd., describes his experience. Co-manager Ken Corner and Mr. Pickering trade commodities, currencies, equities and interest rates for the private clients of Auspice Diversified Commodity LP and Auspice Diversified Trust.
But they also manage the Claymore Natural Gas Commodity ETF, which is traded on the Toronto exchange and is designed to track the performance of the benchmark NGX Canadian Natural Gas Index, providing exposure to the Alberta natural gas market.
The fund is sponsored by Claymore Investments, a retail investment business. Its parent company, Claymore Group Inc., was responsible for $12.9 billion in assets as of June 30th. Guggenheim Partners LLC, a $100 billion asset manager, is acquiring Claymore Group.
Manages futures clients generally don't mind managers having dual roles. If anything, managing a publicly traded fund can be reassuring because it shows that the CTA can meet additional regulatory requirements.
Opalesque Futures Intelligence: What did you do before starting Auspice?
Tim Pickering: My business partner Ken and I have very similar backgrounds. I was vice president of option trading for Shell Trading Gas and Power and before that I was at TD Securities. He also was at Shell and TD. Ken joined Auspice soon after I founded it in 2005 . Our initial funding came from private investors in Calgary. We started trading in April 2006.
OFI: How did you get the seed capital?
TP: The original investors had a lot of oil and gas exposure because generally that's where their wealth came from. But they wanted a diversified commodity investment that went beyond oil and gas and included everything from soft commodities to currencies. Our CTA met that need.
OFI: How did you develop the business?
TP: The second step in building the business was different from starting the CTA. We went into partnership with Claymore Investments to develop the natural gas-index based exchange-traded fund, which started trading in February 2008.
OFI: In what ways does managing an ETF differ from managing a CTA?
TP: Trading for the CTA we look to make alpha returns, but with the ETF the goal is to make sure that the fund stays fully invested. My job is to keep the ETF invested in physical natural gas in Alberta. If a dollar comes into the ETF, we buy a dollar's worth of natural gas forward contracts.
OFI: Do you use the same skills?
TP: With the CTA, we use our commodity and futures expertise in active trading to take advantage of opportunities in volatile markets. With the ETF, we use our knowledge of the natural gas market to get the right prices. The Canadian natural gas market is a wholesale market, where you have wholesale traders like BP and Shell. Our goal was to bridge the gap from wholesale trading to a retail product. Our background helps.
OFI: Does the ETF differ in business requirements?
TP: The CTA and ETF businesses are pretty different. For one thing, Claymore does the distribution of the ETF. By the way, this fund's investors are not only from the retail market. It gets institutional interest too, especially nowadays. We have a number of US and Canadian market makers now involved in its trading.
OFI: What made you go into the ETF business?
TP: The ETF generates a stable revenue stream. Our active trading CTA business varies from year to year-some years there are many trading opportunities, other years there are few. The ETF is a different business model, where we split the fee with Claymore. It is a small fee but it is stable and of course provides working capital.
OFI: Please describe your CTA strategy.
TP: We are medium- to long-term trend-followers. Adjusting to specific market conditions is extremely important in commodity trading. It's not just a matter of identifying trends but finding the cue to exit. Understanding that your strategy and risk management approach must adapt to volatility and the prevailing market condition is critical. For instance, the natural gas market is distinct from agricultural markets. And natural gas is very different to trade at 30 volatility than at 130.
OFI: What's the market for CTAs like in Canada?
TP: There are very few CTAs in Canada, probably less than half a dozen. Managed futures assets are a tiny fraction of what they are in the US. Interestingly, Canadian banks have big commodity trading operations. You'd think they'd create more products for investors, but it has not developed that way, possibly because investors have been focused on resource-related stocks. The Canadian hedge fund industry as a whole is significant but it is largely focused on equities. The managed futures market is developing, though slowly. We are optimistic.
OFI: Are investors still interested in commodities?
TP: Clients' interest in commodities is picking up. That's what we see in Canada. People were getting indirect exposure via stocks, but now they're realizing the benefit of getting direct exposure to commodities. We're just at the cusp of commodities being widely accepted as an asset class by retail and institutional investors..
OFI: It's been a tough year, hasn't it?
TP: We've given only a small portion of the 2008 gains back, about 5%, it's just been quiet most of the year. But that changed in August and September. Opportunities started to show up. In August we were able to put on profitable trades in commodities and financial futures and September has been a good month.
OFI: Will regulatory changes in futures and commodities affect your business?
TP: Not our CTA business, but there could be some impact on the ETF. We're monitoring closely how they're going to address regulatory issues. We do not trade NYMEX futures, so we won't be directly affected by changes there. We don't see the changes being problematic, however.
OFI: What about the claim that oil ETFs pushed up prices because they're so large compared to the oil market?
TP: There is no evidence that ETFs had that effect on the price of oil. On the contrary, when oil peaked in mid-2008, the US oil ETF had been shrinking. Money had been leaving the fund.
OFI: Is greater volatility better for you?
TP: We made high returns trading in the chaotic 2008 market, but we prefer to have relatively stable markets, because extreme volatility hurts our customers' other investments. Market stability is better for developing the business.
OFI: How does the future look?
TP: Commodities offer great opportunities. The economic fundamentals remain strong. The selloff in late 2008 happened because people needed liquidity and commodities are easy to sell. We think next year will be a very good year.