Equinox Fund Management, a sponsor of alternative investment funds, has launched the Equinox Commodity Strategy Fund, a market-neutral mutual fund designed to produce returns by exploiting potential inefficiencies in the systematic selling and repurchasing of expiring futures contracts commonly employed by long-only commodity strategies. The fund has three classes of shares, with the symbols EQCAX, EQCCX and EQCIX.
The fund offers investors an opportunity to diversify their current holdings in long-only commodity funds and ETFs, by employing a long-short investment program. The Fund’s investment program is designed to address three challenges common to long-only commodity funds: the high level of volatility inherent in many long-only commodity funds; the increasing correlation of long-only commodity funds to other asset classes – a problematic trend due to the fact that many investors seek out commodity funds for their lack of correlation; and the systematic negative roll yields that long-only commodity funds and ETFs often face in commodity markets with rising price curves (markets in contango).
Robert Enck (pictured), President and CEO of Equinox says: "At Equinox, we keenly appreciate both the opportunities and challenges of investing in commodities. We have created the Equinox Commodity Strategy Fund as a means to address critical issues of volatility, correlation, and index integrity, while providing investors with an investment that draws upon our knowledge and experience in the commodity markets."
Markets in contango pose particular difficulties for long-only funds. Because futures contracts are sold and repurchased, forward prices commonly can be higher than spot prices. Accordingly, an investor desiring to hold a long position past the expiration of the current futures contract must sell that contract at a lower price and pay a higher price to buy a new one to maintain exposure to the commodity. The resulting systematic loss, or tracking error, is known as "negative roll yield."
Rich Bornhoft, CIO of Equinox Fund Management, says: "The objective of the fund is to avoid incurring negative roll yield in contangoed markets by investing in a proprietary index that employs algorithms to optimise the manner and timing in which futures contracts are bought and sold. The fund also seeks to profit in each commodity market it trades by using a number of other enhanced algorithm-based rolling mechanisms."
The fund employs a market neutral strategy that is equally long and short each commodity. It uses a targeting mechanism to dampen volatility, the goal of which is a standard deviation of 6% or less. The strategy seeks to profit in rising or falling market environments, while providing low-to-negative correlation to traditional investments.