Q&A: Commodities 2.0 with Argon Capital Management

Oct 27 2015 | 12:57pm ET

Editor’s Note: Commodity markets have been under significant pressure this year from a perfect storm of excess supply and diminished demand, but in typically cyclical fashion, the seeds of the next bull market may already be sown. FINalternatives recently spoke with Argon Capital Management co-founder and chief investment risk officer Marcos Bueno about the opportunities inherent in commodity downturns, and his new fund’s novel approach to this notoriously fickle market niche. 

Tell us a little bit about your company. 

Argon is a new breed of commodity fund – commodities 2.0, if you will. We were born from a desire to serve investors better than what has been done in the past. Commodities have been a difficult asset class for investors due to its fragmentation, high volatility and specialist nature – problems we aim to solve. This resulted in many investors gravitating towards long-only passive investments, or funds of hedge funds, where they have suffered from poor returns and high fees – which we aim to solve, too. We take a multi-strategy approach that takes advantage of the structural inefficiencies of commodity markets and by always doing what is in the best interest of the investor.  

Talk more about the multi-strategy nature of Argon. How does it work?

We deploy a number of commodity-centric strategies, each run by an in-house PM or team. While they work alongside each other, they are independent, and investors receive the blended return of these strategies. This takes advantage of the naturally low correlation across commodities, thus improving Sharpe ratios while offering a more consistent return and lower volatility than any of the individual strategies on their own. It also allows us to bridge the information gap across asset classes. When we look at futures, equities and currencies to express commodity views, we can detect shifts much quicker because we feed from many different sources of information. And, we have many more tools at our disposal than we would have if we restricted ourselves to one single market or asset class.

What can you tell us about Argon’s separation of business functions?

In the commodity world, there are many size-constrained, niche strategies. While that is a great competitive advantage when it comes to generating better returns, it also means that many commodity hedge funds remain small. As a result, the main portfolio manager is often also the main marketer and business manager, which prevents him or her from focusing 100% on the markets, and returns suffer as a result. At Argon, we have completely separated those functions. Our portfolio managers focus exclusively on generating returns, and by doing so, keep their trading edge intact. We have also established our risk manager at the top of the food chain, if you will. All the PMs report to me, and that allows us maintain a very systematic, disciplined and independent risk management process that mitigates the risk of excessive drawdowns.

When considering an allocation to commodities, capacity constraints are top of LP minds. How does your methodology mitigate this concern? 

That’s right. Investors are duly concerned with a deterioration of returns as firms get larger, because they may go beyond what would allow them to deploy their strategies optimally. The beauty of Argon is that our approach allows us to offer much larger capacity to our investors than the traditional commodity hedge fund, while maintaining individual strategies at or below their natural capacities. As a result, our investors can reap benefits of scale, mostly in terms of a true institutional infrastructure and lower cost ratios, while receiving the superior returns that niche strategies normally generate. 

How is Argon navigating the current commodity environment? 

Argon is an absolute return firm. We don’t depend on any particular market condition to generate returns. Commodities are a cyclical asset class, and as such, it requires active managers that can take advantage of those cycles, and be long or short at the appropriate times. We’re clearly in a bear market, and that has reduced interest in the asset class during the last couple of years. That being said, some of the most sophisticated investors in the market have begun to show interest, recognizing that times like these often generate the best opportunities. From our perspective, the fact that so many other commodities hedge funds have shut down and banks have reduced commodities headcount means that Argon is able to attract world-class talent.

What is your view on the commodity cycle going forward? Does a rise in interest rates worry you? 

Commodities are going through a lot of change right now, and low prices are putting a significant amount of pressure on producers. This will ultimately result in supply reductions, either involuntarily through bankruptcies or voluntarily through the shelving of projects. We are excited about it; this is an environment where we should see plenty of opportunity. The main reason behind the bear market has been the availability of cheap capital, which was driven in turn by the low interest-rate environment and encouraged overproduction and investment in sub-optimal projects. For the same reason, we see an eventual increase in interest rates as the turning point for the cycle. Higher interest rates will decrease supply and lead to an increase in prices. As it’s often said in commodities, the best cure for low prices is low prices. It’s just the nature of the market; the cyclicality is what makes it so interesting and what creates opportunity. 

What is one interesting or unusual fact about yourself and the firm?

You’ve probably heard of Moneyball, the idea that in baseball, and generally in sports, you can use quantitative analysis to create an all-winning team by putting together players that complement one another. It debunked the idea that having a headline making “star” was the best way to get results. The same is true in hedge funds – so I’d like to say that you could think of us as the “Moneyball of commodities”.


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