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Liongate would rather quick step than contango

Fund of hedge funds manager Liongate Capital Management has created a fund of commodity hedge funds on the back of an internal portfolio that has produced positive returns over one year.

The company says some advisers may be keen to invest in commodities through an index rather than a fund of hedge funds but that investors can suffer heavy losses when the prices of commodity futures are higher than current market prices.

This is called contango and it can also happen where prices of longer-dated commodity futures are higher than those with a shorter duration.

Liongate’s fund is actively managed and aims to protect capital during periods of volatility by shifting into different hedge fund strategies as market conditions change.

Lead analyst Adam Taylor says this approach enabled the fund to produce a 0.36 per cent return in the 13 months to the end of January compared with a 51.27 per cent fall in the Goldman Sachs Commodity index and a 45.54 per cent fall in the MSCI World index.

Performance was driven by a long bias to the portfolio in the first half of 2008, then a switch to more liquid and relative value strategies when soaring commodity prices led to concerns the market was overheating.

The liquidity in the fund allows over three-quarters of the portfolio to be changed in three months, which Liongate says is an advantage when investing in volatile assets.

Taylor says: “Another advantage is that the managers we invest in have been trading in commodities for 20 years. They have the skills to trade in a market which has no obvious trend.”

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