global growth spurred company's move into sector
Permal has launched a natural resources fund of hedge funds to capitalise on what the firm sees as one of the major themes of the year.
The move follows heavy investment in the sector already by the company's multi-strategy hedge funds.
Launched in January, the Lux Natural Resources Fund is up just over 2% this year, according to Permal. It invests mainly in precious metals and energy but also in soft commodities such as food, through both the commodities themselves and connected companies.
According to Omar Kodmani, Permal's senior executive officer, commodities is not a passing phase, and a multi-manager hedge fund is the best way to access the area and get downside protection at the same time.
The product invests in 15 underlying hedge funds, with its heaviest weightings by far in the more established managers. Newer managers receive little investment until they have produced a track record.
A deal breaking criteria for choosing whether or not to invest with a manager is how much of their personal wealth is invested. They must have a significant percentage in the fund for Permal to feel happy with the situation, says Kodmani.
Choosing managers for a natural resources fund requires a degree of creativity because there are few of them, he adds. Permal approached managers it already respected and asked them to launch natural resources hedge funds specifically for the purpose of receiving investment from Permal's fund of funds.
Energy and precious metals are the main focus of the fund because they are the most liquid sub-sectors of natural resources and produce the widest spectrum of investment themes.
Geographically the fund invests most heavily in Russia and Asia, regions that are among the largest producers and users of natural resources.
The driving force behind the natural resource investment story is global growth, according to Kodmani. "This is the first time in a long time that all the major regions of the world are growing at the same time," he says.
This synchronised growth has lead to increasing global demand for commodities.
If US growth were to stall or the Chinese economy was to overheat momentum would stall in commodity prices, but Permal's expectation is that the theme will continue unhindered.
There may be shorting opportunities for astute managers able to trade in short-term commodity price falls, and some of the managers Permal invests with use this strategy.
However, the fund favours investment with hedge fund managers arbitraging the difference between the commodity itself and stocks linked to it, according to Kodmani.
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