Coming into October, Duet Commodities was expecting volatility. It wrote about this expectation in its September letter to investors, and the fund took action, fully positioning itself for the event in both its volatility and directional portfolios.
Duet Commodities benefited from volatility in oil
The hedge fund benefited from the resulting volatility, as it had a strong October, up 2.72 percent and positive by 15.40 percent on the year. In particular, the fund put in place long volatility positions in oil across the curve, which significantly drove performance on the month most noticeably lead by WTI exposure.
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Not only did the fund have a volatility collar on the oil market, but is also had directional plays in Brent, which performed well. However, mixed performance from directional bets in metals offset the oil gains. Aluminium was positive and the fund still remains positive on base metals and may add to positions if it see opportunistic entry points.
In the fund’s relative value, spread trading strategy, the profits came primarily from long / short exposure to Brent and WTI spreads as well as small gains on Natural Gas and Gas Oil crack spreads.
Duet Commodities: The US dollar bull market
Last month the Duet Commodities investor letter predicted a new catalyst would be needed to drive the US dollar higher. The fund, as well as the market in general, at the time didn’t anticipate the Bank of Japan would provide that catalyst in dramatic style, increasing their pace of QE at the same time as the Government Investment Pension Fund cut its bond holdings in favor of greater equity ownership. As a result, the letter notes the US dollar bull market was thus reinvigorated at the end of the month.
Forecasting future developments, Duet Commodities thinks neither European nor Japanese policies are likely to directly drive the outlook for commodities. “Nevertheless, divergent central bank action will – via its impact on the US dollar and global interest rate curves – continue to have a heavy influence on both market direction and, in particular, volatility,” the letter said, noting a common theme among hedge fund managers who anticipate central bank action to drive volatility in the coming market environment.