The Billion Dollar Interview:
Michael Coleman of The Merchant Commodity Fund
Mr Coleman, together with his partner Doug King, founded Aisling Analytics in 2004, a Singapore-based commodity focused hedge fund manager. Aisling's flagship product is The Merchant Commodity Fund which launched in June 2004. A proprietary commodity trader since starting work in 1982, Mr Coleman worked for Cargill for 19 years in a variety of commodity trading and trading management positions. In 2001, Mr Coleman in conjunction with Marubeni founded U Derivatives where he was Chief Operating Officer until April 2004. Mr Coleman has been based in Singapore since 1984. A UK citizen, Mr Coleman was born in St. Helens Lancashire and is a Director of St. Helens Rugby League Football Club. He studied at Exeter College Oxford where he attained a BA in Natural Science (Geology).
Eurekahedge: Commodities form a very small percentage of the asset allocation in most CTA/Managed futures funds, however in your case that is the principal investment sector. What is unique about the commodities sector that leads you to invest in it?
Michael Coleman: We did not decide on commodities, commodities decided on us. My partner Doug King and I spent many years as physical commodity traders with major trade houses prior to moving into the fund management business. It was a case of taking our expertise into the fund space.
EH: Can you give us an overview of your investment strategy and how it differs from a ‘regular’ CTA fund? Tell us about the qualitative and quantitative research that forms a part of your investment process. Do you bank on electronic models for your research and trading? If so, to what extent?
Coleman: Our strategy is. a) based on fundamental supply/demand analysis, b) non quantitative,
c) completely discretionary and d) while the majority of our views are expressed via exchange traded futures and options, we also trade otc swaps and occasionally physicals. Taken together this gives us a much different flavour from typical CTA offerings.
EH: Which are the different commodities that you allocate to? Do you have any fixed asset allocation ratio or any floor/ceiling in place for your allocations? If so, on what basis do you decide these? Could you tell us a little about the geographical diversification of your investment portfolio?
Coleman: We trade a broad range of energy, agricultural and soft commodities including ocean freight. We do not trade metals, power or emissions. We do not have fixed allocations to specific commodities or sectors and aim to be opportunistic in moving risk to opportunity. Ceilings for individual commodities are dictated by liquidity constraints that we calculate with reference to open interest and daily volume and we have certain over riding concentration limits.
We trade globally and the size of our positions on different exchanges is primarily a function of available liquidity. Because of our Asian base we probably have a higher percentage of AuM deployed in Asian commodity markets - TOCOM, TCE, SGX, MDEX etc relative to many of our peers.
EH: The Eurekahedge CTA/Managed Futures Hedge Fund Index is down 2.82% June 2011 YTD. On the other hand, The Merchant Commodity Fund has registered a much greater decline – could you shed some light on your performance this year and what are the factors driving these returns?
Coleman: We have indeed had a poor first half of the year. The discretionary nature of our process is what has allowed us over the life of the Fund to deliver strong over performance but of course this approach also allows for the possibility from time to time of, hopefully, shorter periods of underperformance.
EH: The performance of your fund since inception, has been exceptional (you have won the Eurekahedge Best Asia-Based CTA Award 3 times in the last 4 years) – is there something that you are doing differently this year that has resulted in this dip?
Coleman: Not every year could be described as exceptional – 2004 and 2009 were positive but ordinary. While the first half of this year has been poor we have in 2008 and 2010 recovered from similar intra year peak to trough draw downs and are confident that we will be able to do so again.
EH: Tell us a little about the risk management tools and practices you have in place to safeguard your investors’ wealth. Although you delivered a superb performance for 2008, did you make any changes to your risk management framework in the wake of the financial crisis?
Coleman: Our Risk Management process involves a mixture of Stress Limits and VaR and PNL targets and is constantly evolving in the light of experience and the changing nature of the marketplace. Our experiences in March 2008 for instance, prompted the introduction of hard stress limits into our process.
EH: Do you mind giving an overview of your investors (i.e. institutes, FoFs, etc – and how long they have been invested)? Also, how is this spread geographically?
Coleman: Our investor base is currently approximately 66% Fund of Fund/Intermediary, 13% Institutional and 21% HNW/FO and geographically 75% European, 15% Asian and 10% other.
EH: We have seen some inflows to CTA/managed futures funds this year; US$5 billion – did you attract any interest from investors this year?
Coleman: Yes we have seen both positive inflows of funds during the first half of 2011 and possibly the longest due diligence pipeline we have ever had.
EH: The Asian hedge fund industry currently manages US$134 billion in assets, which is a fraction of the size of the European and North American hedge fund markets. As the manager of a billion dollar hedge fund, what do you think other managers can do to attract more capital? Do you think there is a single catalyst that will propel more assets to Asian hedge funds? How do you see the new regulatory regime in the US and Europe affecting flows to Asian hedge funds?
Coleman: From a manager’s perspective it is all about building a solid operation, demonstrating a competitive advantage, delivering interesting returns and having some scalability.The last point is possibly the biggest handicap for Asian managers given the size of the underlying markets that many operate in. I do not think there is a ’single catalyst‘. I think it is a long game where capital accumulates and the range and diversity of managers increases to reach a critical mass and network effects multiply.
EH: You made some comments in the press recently about the difficulty of starting a hedge fund in a post-Lehman environment. Why do you think Asian investors are not as keen on hedge fund investments as compared to the Europeans or North Americans?
Coleman: I think it is largely a function of the stage of development of the market. Much of the family money in the region is relatively new, focused very much on capital appreciation rather than preservation and so, is less inclined to put money with managers The institutional money in contrast tends to be ultra conservative and therefore equally disinclined to hedge funds.
EH: Most new Singapore launches over the past decade have started with less than US$10 million, and pretty much all the billion dollar funds in Singapore around the time of the financial crisis were boutique shops that launched with friends and family money and subsequently build up their asset base. Most of these managers lost a lot of their assets through the financial crisis and consequently liquidated their funds. You have done well to ride this out with an impressive US$1.3 billion now. How did you manage that, especially given that you have a highly liquid fund structure? Did you do anything different to other managers, did they do anything wrong? And how what advice would you give to small local start ups these days?
Coleman: I think there is no doubt that our strong performance over the crises was the key factor though that did not prevent us losing over 60% of our AuM in redemptions over the period September 2008 to March 2009. Somewhat paradoxically I think the fact that we were highly liquid gave investors a degree of comfort that they did not need to make pre-emptive redemption requests and that helped. That level of comfort was reinforced as we demonstrated that redemptions of US$200 and US$300 million per month could be comfortably met.
EH: Could you give us your near- and medium-term outlook of the commodity markets, especially gold and oil? Do you foresee any new trends taking shape?
Coleman: We don’t trade gold so other than the observations that it has clearly become a monetary asset again and that until such time as we return to some degree of macro- economic stability accompanied by more normal real interest levels then the environment remains positive for it. From a bottom up fundamental perspective crude oil prices should be well supported as we move into the second half of 2011 as seasonal and year on year demand increases come through. The flag of course being any significant deterioration in the demand side of things. While a long way from being a monetary asset we have however seen increasing financialisation of the crude oil market in recent years and so any change in the propensity of investors to either increase or decrease holdings of crude oil futures in response to the evolving macroeconomic environment will continue to have a major impact on price levels .To add an extra degree of difficulty to this side of the equation we have seen the first overt action by consuming country governments to attempt to influence prices via the recent stock releases by the I.E.A.