New structured fund to harvest commodities returns

Deutsche Bank launches a Singapore-listed structured fund that uses a long/short strategy to capture roll returns on 21 commodities.

Deutsche Bank is offering retail investors in Singapore an opportunity to trade commodities in the same way as professional investors. The DB Platinum Commodity Harvest Fund uses a long/short strategy on 21 commodities to exploit carry trades in futures markets.

Daily movements in gold and crude oil spot prices are staples of the business news, but of little interest to most professional commodities investors because the only way to trade commodities without taking physical delivery of a tanker-full of crude oil is to buy futures. And futures prices are subject to quirks that make the spot price irrelevant.

Typically, the most popular futures contracts are for delivery in one month. Investors buy this contract and hold it for a month before trading into a new futures contract. Rolling from one contract into another in this way can yield profits or losses, depending on the price difference between the spot market and the futures market -- if the cost of delivery in the future is lower than the cost today, investors can make a nice return regardless of movements in the spot price because they are buying low and selling high.

Taking advantage of these roll returns is the way that most commodities investors make money, but it is not an easy strategy for retail investors to replicate. Deutsche's latest product launch in Singapore aims to change that. The fund uses a structure that Deutsche's institutional clients have been trading very successfully since the end of 2007.

If futures contracts for one of the 21 commodities are trading at a discount to the spot price, the index buys the month with the biggest discount (up to the 13th month) and shorts the nearest month contract to isolate the roll return. If futures are trading at a premium to the spot price, the index buys the month with the lowest premium and shorts the front month. As a result, the index has been very stable and has no directional exposure to commodities markets, as well as being uncorrelated to traditional asset classes.

"The Harvest fund has been one of the few indices to provide consistent returns with low volatility in 2008, despite market contagion," says Sharon Loh, a director in Deutsche Bank's global markets investment product group. "Clients currently find it very challenging to take a directional view of the market, so market-neutral products such as these are providing a welcome alternative."

Investors who are unfamiliar with the underlying concept will nevertheless be attracted by the 12.82% return the index provided in 2008. Using historical data back to November 1997, the US dollar version of the index would have booked a yearly return of 9.52% with volatility of 3.5% -- compared to a 0.26% return and 24.2% volatility of the S&P Goldman Sachs benchmark commodity index, which does not exploit roll returns.

The fund is sold in euro and dollars, with a 1.2% management fee, a fixed fee of 0.15% and an upfront subscription fee of 5%.

The fund is also being offered in a slightly riskier flavour, with a target volatility of 10%. This version, which has a higher management fee of 1.5%, returned 44.7% in 2008 and has a historical return of 22.58% a year.

The 21 commodities in the index are split between energy, precious metals, industrial metals and agriculture.

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