Man Says Commodities Divergence Increasing Supply-Demand Role

Diverging prices for raw materials and other “risk assets” is a sign that traders will once more focus on supply and demand, said Scott Kerson, the head of a commodities unit at Man Group Plc in London.

The Standard & Poor’s GSCI gauge of 24 commodities fell 3.9 percent this year, while the MSCI All-Country World Index of equities rose 8.3 percent. The 30-week correlation coefficient between the two measures is at 0.56, down from as much as 0.88 in 2010. A figure of 1 means the two move together.

“What’s going on in commodity markets right now, and in particular the de-linkage between commodities and other risk assets, is actually a positive thing for trend followers generally and specifically for systematic commodities traders,” said Kerson, who heads commodities at Man Systematic Strategies and AHL. Assets under management at the two funds were $16.3 billion at the end of March 2013. About 25 percent of the funds’ assets are allocated to commodities.

The S&P GSCI gauge declined this year after an almost fourfold gain since the end of 2001 spurred new mines, oil wells and crop acreage. This year will probably signal “death bells” for the raw materials supercycle as China’s economic growth slows and the nation focuses less on infrastructure and urbanization, Citigroup Inc. said May 20. Deutsche Bank AG also called an end to the longer-than-average time of rising prices.

Man’s Assets

The divergence between raw materials and other assets means commodities should “start to trade on their own fundamentals and markets should evolve according to the underlying supply and demand characteristics of each individual market as opposed to a more general reflection of the overall macro economy,” said Kerson, who joined the company in November 2011.

Man Systematic Strategies and AHL, which were merged in February, have more than 100 employees, with eight in the commodity team in London and Switzerland, he said. Man’s total assets under management are $54.8 billion, making it the world’s largest publicly traded hedge-fund manager.

Natural gas and cotton are the best performers in the S&P GSCI index this year, with silver and gold dropping the most. Commodities are down about 30 percent since July 2008, when the worst recession since World War II curbed demand. While economic growth in China, the biggest user of everything from copper to cotton to coal, accelerated in 2009 through the start of 2010, it slowed in eight of the past nine quarters.

Commodities rose in 10 of the last 11 years. Raw materials have been in a supercycle since 2001 and the average length of each phase since the late 1700s has been almost 21 years, Chris Watling, chief executive officer of London-based Longview Economics Ltd., said in October at a conference in London.

Commodities Cycle

“We’re less interested in calling the beginning or the end or the middle of the cycle, and much more interested in how we think price dynamics should play out for underlying markets,” Kerson said. “Crude oil markets we’d characterize as being in a transition phase and not particularly friendly for systematic trading. Metals, and in particular gold and silver, have been a much more interesting place for us to be.”

Oil is up 1.3 percent this year at $93.05 a barrel in New York and traded in a $17 range since the beginning of July. Gold slid 16 percent to $1,411.60 an ounce in London this year and silver tumbled 25 percent to $22.6875 an ounce, with both metals falling into a bear market in April.

Kerson was formerly the owner of Alpha Dog Commodities LLC, a California-based consultancy which focused on quantitative analysis of the global commodity markets, from 2009 to 2011. He also previously worked as a trader at Ospraie Management LLC, Amaranth Advisors LLC, and Standard Bank Group Ltd. in New York.

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