Axiom Says Commodity Funds Trounce Falling Stocks

Date: Thursday, August 23, 2007
Author: Saijel Kishan, Bloomberg

Aug. 22 (Bloomberg) -- Axiom Fund Manager Ltd.'s Mohammed Syed, the world's best-performing investor in commodity hedge funds this year, says the stock market rout bolsters his view that grain, mining and oil beat falling equity prices.

``If you'd invested in commodities, it would have limited the negative impact of the fallout,'' Syed, 44, founder and chief executive officer of Cayman Islands-registered Axiom, said in a telephone interview from his London office. The company manages more than $200 million.

Between March 24, 2000, and Oct. 9, 2002, the last bear market, commodity prices as measured by the Reuters/Jefferies CRB Index rose 6.3 percent and the Standard & Poor's 500 Index fell 49 percent. When stocks fell 34 percent from Aug. 25, 1987, to Dec. 4, 1987, the commodity index rose 2.6 percent.

Syed's clients are already ahead of other commodity investors. His $60 million Axiom Opportunities Fund is the best performer among 40 funds that buy shares of commodity hedge funds. It returned 14 percent in the first six months of 2007, according to InvestHedge, a London-based hedge fund research company. The UBS Bloomberg Constant Maturity Index of 28 commodity futures returned 9.2 percent.

Funds investing in all types of hedge funds returned 7 percent on average over the same period, according to InvestHedge, which tracks 2,600 portfolios. The Standard & Poor's 500 Index rose 6 percent, while U.S. Treasuries have returned 2 percent, according to Merrill Lynch & Co. indexes. InvestHedge's most recent fund data runs to the end of June.

Gas and Cattle

Syed usually invests in about 18 hedge funds, which themselves trade contracts from gas and cattle futures to mining and shipping stocks. Axiom's biggest holdings are in energy hedge funds, which account for 34 percent, while mining and utility funds each make up 11 percent. About 5.5 percent of the portfolio is in hedge funds that trade agricultural commodities or shares of farming companies.

His best-performing holdings in the first half invested in commodity transportation and energy. Castalia Straits, a New York-based fund managed by Jay Goodgal, returned 25 percent in the first six months of the year after buying shares of shipping companies. Goodgal also bought freight contracts in a period when transportation charges rose.

The cost of transporting so-called dry-bulk commodities such as coal and iron ore rose 41 percent, as measured by the Baltic Dry Index. Port congestion in Australia delayed vessels from leaving their berths, reducing the number for hire.

No Panacea

Syed also invested in the $745 million Oceanic Hedge Fund, managed by London-based Tufton Oceanic Ltd., which buys shipping and energy companies. The fund, managed by a seven-person team led by Cato Brahde, gained 17 percent in the first six months.

Investing in commodities isn't always the panacea for a falling stock market, according to Eliane Tanner, a commodities analyst at Credit Suisse Group in Zurich.

On some past occasions, stocks and commodities have moved in the same direction, countering the view that natural resources always offer an alternative to falling equities. Between 2003 and 2006 the S&P 500 Index rose 56 percent, while the UBS Bloomberg CMCI gained 129 percent.

``It's not a good time to jump in and buy commodities,'' said Tanner. ``There's so much volatility in the markets at the moment.''

`Stronger Stomach'

Losses can be bigger in commodities than other types of investments, according to Aoifinn Devitt, founder of London- based Clontarf Capital. It advises on investing in so-called alternative assets, including hedge funds.

``You need to have a stronger stomach,'' she said. ``Given the volatility in the underlying commodity markets, it's not for the cautious investor.''

Amaranth Advisors LLC lost $6.6 billion last year in the biggest hedge fund collapse after placing wrong-way bets in the natural-gas market. MotherRock LP, a $400 million energy fund based in New York, also went out of business in 2006 on losing energy trades.

Still, commodities have fallen at less than half the pace of stocks during the most recent market turmoil. The Morgan Stanley Capital International World Index, a global stock market benchmark, has declined 5.9 percent since June 1 while the UBS Bloomberg Commodity Index has fallen 2.8 percent.

``People should have been in commodities,'' Syed said. ``It's a great diversifier that can enhance overall returns.''

Agriculture

Syed, who was born in Multan in central Pakistan, graduated from the University of London in computer science in 1985 and the following year earned a master's degree in management science. Before starting Axiom in 2002, he worked at companies including Barclays Capital, the investment banking unit of Barclays Plc, where he was the head of derivatives trading and fixed income for Asia.

Now, Syed says he wants to boost his investments in agriculture funds as record oil prices spur demand for biofuels. Corn, an ingredient for ethanol, rose to a 10-year high of $4.50 a bushel in February. Wheat rose to a record $7.19 on Aug. 15, while soybeans rose to $9.50 a bushel on July 13, the highest in three years.

``We don't see this as a fad,'' Syed said. ``The supply- demand balance is in favor of higher agriculture prices in the coming years.''

He has invested in Aisling Analytics Pte Ltd.'s Merchant Commodity Fund, which gained 17 percent in the first six months, partly because of bets on rising prices for soybeans and other grains. Aisling Analytics, which manages $1 billion in assets, is run from Singapore by Michael Coleman and Doug King, former traders at Cargill Inc., the largest U.S. agricultural company.

Syed is still facing a significant obstacle: he can't find the managers to invest in. Of the 370 commodity hedge funds worldwide, just 2 percent focus on agriculture.

``We've wanted to increase our exposure for at least six months but just cannot find enough people,'' he said.

To contact the reporter on this story: Saijel Kishan in London at skishan@bloomberg.net