For Commodity Funds, It Was As Good As It Gets

August was the time to rake it in

For most investors, August was the month from hell. Not for William Dunn, though. His firm, Dunn Capital Management, with $900 million under management, had one of its best runs in years. He's up 25.4% so far this year, and 23.7% in August alone.

Dunn's managed commodity fund trades in futures and options on stocks, bonds, and currencies as well as physical commodities such as copper and oil. His technical trading systems, which follow price trends, has had the fund selling stocks and physical commodities and buying global bonds. "People are running for safety," he says.

"PRETTY CRAZY." The main draw of commodity funds is that, in the long run, their performance has little correlation with stock and bond markets. Until recently, though, managed commodity funds as a group underperformed the stock market for several years. While the Standard & Poor's 500-stock index climbed 106% between 1995 and 1997, the index compiled by Managed Accounts Report, an industry newsletter, was up only 45.3%. "It's been difficult competing [for funds] with the incredible bull market in equities," admits Dunn, despite the fact that he has beaten the S&P during the last three years.

Richard Dennis, head of Dennis Trading Group, who manages $220 million, also had a torrid month. "Between the ruble, Yeltsin, and the deep blue sea, it's been pretty crazy," he says with a hint of glee. Dennis was up 13.5% in August, giving him a year-to-date return of about 45%. MAR's index of 400 funds was up 5% in August, with trend-based managers up 15.3%.

The $35 billion managed futures funds business runs the gamut from huge portfolios of institutional money, especially pension funds, to retail pools sponsored by brokerage houses. Physical commodities typically account for only 10% to 15% of the investments a large fund manager will make because of the markets' relatively small sizes. Equity derivatives, including the S&P index, make up 20% more. Currencies and interest-rate products, such as the futures contract on the U.S. Treasury bond and German bund, together account for about 60% to 65% of total investments.

Some two-thirds of the industry's assets are run by fund managers like Dunn and Dennis, who rely systematically on computers to discern and follow historical commodity price trends. That allows them to invest in large numbers of markets without carrying a huge staff of analysts. "We don't make market predictions," says Dunn. "We just ride the bucking bronco."

Sometimes, the ride can be especially rough. Take currency. Most managers got creamed when the Federal Reserve intervened to halt the slide of the yen on June 17. Other recent trends have been more predictable. And the more enduring the trend, the better the results. The protracted decline in physical commodities prices has enabled John Henry, a systematic trader who runs $2.25 billion in assets, to make money shorting crude oil and some farm commodities.

The most solid trend has been a flight to quality by U.S. and foreign investors. That means bonds, particularly of developed countries. Skittish investors fleeing equities have poured into the U.S. Treasury market. Prices have soared this year, sending yields to record lows. The same is true of the German bund. Dennis says he made about $20 million buying bund futures. "It's been a one-way trend," says Dennis. "If you haven't made money there, you should be in a different job."

Most commodities plays aren't so easy, of course. But then the stock market doesn't seem too predictable either. With financial markets around the world unstable, commodities funds offer, if not a safe haven, at least a nice option to diversify.

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