Base metal market volatility is here for the long haul, according to a fund that has banked profits from the violent sanction-led price swings that have characterized market movements in the first half of 2018.
The Raptor Commodities fund, launched by Arion Investment Management in October 2017, has locked in gross returns net in fees of 6.98% since its inception, the company told Metal Bulletin in a recent interview. The fund made net returns to investors of 1.6% in the year to June, including a return of 5.58% in April.
Arion Investment Management has $10 million in assets under management, made up of managed accounts and the fund structure, it said. The Raptor fund made 9.19% gross returns from the volatile price movements in aluminium and nickel, sparked by US sanctions against Russian oligarch Oleg Deripaska and producer UC Rusal in April.
But far from being one-off trades, Arion has positioned the fund to take advantage of a paradigm shift in markets from a volatility perspective - that commodity price volatility should rise when investment banks stop trading commodities and central banks begin to trim liquidity provision measures on a macro level.
“With QE [central bank quantitative easing] coming down, that influence [of liquidity provision] is at an all-time high. It’s natural now that the tendency to have these spikes in volatility has gone up, and that’s an opportunity for us,” portfolio manager Darius Tabatabai said.
Arion sees inefficiencies returning to exchange traded metal markets, where the same-specification copper, zinc or aluminium can be traded on the Shanghai Futures Exchange, London Metal Exchange and Comex.
The company’s strategy of trading LME against Comex copper has returned 77.54% since its October 2015 inception.
“In the last 10 years, banks have withdrawn from being the main risk takers in the market, so there isn’t the same risk warehousing. Before, banks would take big risk and keep prices from moving too much on big flow,” Tabatabai said.
“That’s gone now and flow pushes the market around a lot and there’s more money trading in markets than ever, the influence of things like CTAs [commodity trading advisors] has gone up tremendously,” he said.
Glimpse of opportunities
Base metal markets in 2018 have been characterized by heightened volatility, notably in April, when aluminium and nickel spiked after the US Department of Commerce announced it would place sanctions on Oleg Deripaska, chairman and majority owner of UC Rusal, the world's largest aluminium producer outside of China.
The LME three-month aluminium price gained 35% in nine days from the opening bell of April 6, the day that the US commerce department announced the sanctions.
Subsequently it took just further two trading days for the price to drop from six-year highs of $2,718 per tonne on April 19 to close April 23 at $2,255 per tonne; a 17% decline.
“Being able to take a view on volatility, and be relatively agnostic directionally, allowed us to capture [7%] in April, where that wouldn’t necessarily be the way other people traded it. We’re focused on volatility as the asset rather than aluminium,” Tabatabai said.
The Raptor fund similarly profited from fluctuating nickel prices, which opened at $14,300 per tonne on Wednesday April 18 then rose 17% in two days before crashing back to close Monday April 23 at $14,280 per tonne.
“I’m sure other people made money that month, I’m also pretty sure that no-one had such a straight line up and then just held – I’m sure people would have given up much more P&L [profit and loss] when it came off,” Tabatabai said.
Challenge for consumers
Heightened volatility in the commodities space is a challenge for those who buy metal as a raw material for products, be that automotive manufacturers, house builders or watchmakers.
“It’s probably chopping off profit margins for people,” Tabatabai said.
“If you’re a consumer of metals, some sort of SME you’re probably not doing well hedging at the moment, because there is a prudence element where you have to buy if the price really spikes and then it’s dropping off,” he added.
But what is a challenge for others is opportunity to the Raptor fund, who are betting that sharp metal market fluctuations are here for the long haul.
“I am increasingly inclined to position myself for volatility,” Tabatabai said.
[Editor's note: This article was updated to clarify that Arion Investment Management has $10 million in assets under management.]