If there is an upside to rising energy prices, it might be the increased awareness among consumers and retail investors of commodities and the effect they can have on the economy.
It is this newfound awareness that the promoters of the
Direxion Commodity Trends Strategy Fund (DXCTX) are hoping to tap.
The fund, launched by Direxion Funds in Newton, Mass., June 10 with $20 million, has gotten off to a rough start, proving that there are no silver bullets when it comes to commodities investing.
But it also offers the closest opportunity for mutual fund investors to participate in the commodities markets without having to become professional traders.
Although the fund is technically defined as an index fund, it actually qualifies as a hybrid and illustrates that the evolution of index strategies is blurring the definition of "indexing."
The fund is pegged to the Standard & Poor's Commodity Trends Indicator index, which has the flexibility to go long or short six separate commodities sectors representing 16 underlying commodities. In essence, this is not your father's index fund.
Sector weightings and directions — long or short — are adjusted on the second-to-last business day of each month, based on where the commodities are trading in relation to their respective seven-month moving averages.
The index strategy was developed and is managed for Standard & Poor's of New York by Alpha Financial Technologies LLC in Southlake, Texas.
The re-balancing and reallocations can be dramatic, particularly at times like these, when commodities price movements have been so volatile.
A case in point is the energy sector, which represented 37.5% of the portfolio in July but was cut to zero July 30 based largely on recent declines in the price of oil.
The fund made its debut with half the underlying commodities being held short. Last month, however, sugar was the lone short position in the fund.
The adjustments for August took another swing toward the short side, with grains, livestock, precious metals, industrial metals, cotton, cocoa and coffee all being sold short.
Sugar, meanwhile, has been shifted from short back to long.
The energy sector — made up of heating oil, natural gas, light crude and gasoline — is the only sector that the index will never short, due primarily to the extreme geopolitical risks associated with shorting oil, according to Paul Brigandi, portfolio manager of the Direxion fund.
This kind of quasi-active index strategy represents a step outside the box for Direxion Funds, which has $1.4 billion under management, mostly in leveraged equity index funds.
Prior to this fund, the company's closest offering to a commodities play was the $80 million
Direxion Commodity Bull 2X Fund (DXCLX).
That fund, which is pegged to the Morgan Stanley Commodity Related Equity Index, is an equal-dollar-weighted portfolio of 20 stocks involved in commodities-related industries.
The fund applies leverage to generate 200% of the benchmark's performance. This year through Thursday, the fund had declined by 6.4%, compared with a 14.8% de-cline by the S&P 500.
The Commodity Trends Strategy Fund does not use leverage.
The appeal of the long-short strategy, according to Direxion president and chief investment officer Daniel O'Neill, is its active participation in commodities market movements.
"In historical terms, investing in commodities has always been a zero-sum gain," he said. "There might be a spike in prices, but they always come back down, and you end up, as an investor, with no long-term benefit."
The ability to go long or short specific commodity sectors is designed to take advantage of the volatility. "Clearly, the timing of our fund launch was not great, because oil and some other commodities have recently reversed," Mr. O'Neill said.
In roughly seven weeks since the fund's inception through Thursday, it declined 11.7%, compared with a 5.4% drop by the S&P 500.
"The strategy has gotten hurt because it was long oil, but the bias of the fund will be constantly changing, which is why it's meant to be more of an all-weather fund than one that is simply long commodities," Mr. O'Neill said.
While he acknowledged that the fund "is not a 30-second explanation," he feels that the market is ready for the strategy.
"It's a commodity-driven world right now," Mr. O'Neill said, "and people recognize the need to allocate part of their portfolios to commodities."
Questions? Observations? Stock tips? E-mail Jeff Benjamin at [email protected].
