• Often monopoly businesses
• Typically high barriers to entry
• Strong cash-flow generation and yield
• Active management potential
• Revenue model
• Skills mismatch
• Operational risks
• Liquidity constraints
Commodities are usually thought of raw materials or basic goods and can be put into two types.
Soft commodities can be grown and can be a foodstuff or a manufacturing item. Examples are orange juice, pork bellies, maize, wool, cotton, sugar, timber, vegetable oil.
Hard commodities are thought of as being extracted and include basic metals, such as iron and copper, precious metals, such as gold and silver, coal and crude oil.
• Low correlation to other asset classes
• Strong, if somewhat cyclical returns
• Inflation protection as either prices move in line or arguably cause inflation
• Time lag between investment and production
• Potential for loss between production and delivery
• Transportation risk - danger of loss of cargo
• Recent coverage regarding the pricing of commodities suggests that markets may not be as efficient as thought
Normally called hedge funds and classified previously for UK operated funds as Ucis (unregulated collective investment schemes), as opposed to Ucits (undertakings for the collective investment Of transferable securities) which are regulated. These investments are highly specialised and are used predominately by institutional investors and can be also used by so called sophisticated or qualified investors.
One of the best known hedge strategies is global macro, and typically the one most people associate with hedge funds. These are ‘Gordon Gekko’ type funds with an investment strategy that take big bets, usually in any market, throughout the world.
They take positions that are very large weights in multiple investment types such as shares, fixed interest, credit rates or currency markets, usually in expectation of a change in the macroeconomic environment such as an interest rate change or currency movement due to central bank policy. An example was when the Bank of England exited the European exchange rate mechanism, or could be an unexpected change in the rate of an economic figure like GDP for example. They typically look to deliver a risk-adjusted return.
A derivative of global macro strategies is the global tactical asset allocation strategy. This looks to take advantage of short-term misprices of markets rather than individual securities.
This type of hedge fund takes advantage of relative mismatches in price between investments, in other words, they arbitrage. Investment managers can use fundamentals or quantitative analyses to identify mispricing.
• Fixed income arbitrage: exploit pricing inefficiencies between related fixed income securities.
• Equity market neutral is a popular strategy and it exploits differences in equity prices by being long and short typically within the same sector or industry.