Rising oil prices and continued volatility have made big gains in a corner of the market that rarely grabs the headlines: quantitative trend-following hedge funds.
A number of trend followers – also known as commodity advisors (CTAs) or managed futures – use sophisticated machine learning algorithms, statistical analysis and factor-based modeling to identify price trends in all futures markets, including equities, bonds, commodities and currencies.
The rise in commodity prices caused by the war in the Middle East has given them one of their richest trading posts in years.
By trading in both rising and falling markets, with investment decisions made by computer-based systems driven by data and signals instead of human judgment or emotion, CTAs can often provide returns unrelated to the so-called “crisis alpha” in investment portfolios during market turmoil.
Societe Generale’s main SG CTA index – the main benchmark for the sector and the main measure of the overall performance of the following strategies – rose more than 12.2% in the year to June 3. The SG Trend Index, a daily performance tracker of the 10 largest popular hedge funds, rose 12.3% during the same period.
Energy stocks have been the dominant contributor to CTAs’ gains since the outbreak of conflict in the Middle East on Feb. 28.
Brent crude.
But conflicting narratives about the conflict and the growing uncertainty of US-Iran peace talks are now pushing such strategies to hedge their oil bets.
Helen Doody, head of Abbey Capital US, said many funds established long positions at the beginning of the first quarter as the price of crude oil rose.
“They were ready to film the critical meeting that took place in late February and early March because of the events in Iran,” Doody told CNBC via email. “CTA strategies are also involved in increasing the quality of distillate contracts such as gasoline and diesel.”
Nicolas Gaussel, CEO and CIO of Paris-based CTA Metori Capital Management, which trades both commodities and financial contracts, said about a third of his firm’s performance this year came from energy trading.
Another year of banner CTAs?
The gains compare to 2022, when oil and other commodity prices rose following Russia’s full-scale invasion of Ukraine.
Trend-following hedge funds produced their best annual performance of the year, with the SG CTA Index advancing more than 20%, as managers successfully weathered the ongoing decline in stocks and bonds.
Is the industry now poised for another banner year?
Razvan Remsing, chief product strategist at Aspect Capital, said the impact of the current energy shortage is “much deeper and more widespread” than in previous shocks, which occurred in a highly mixed, globalized country.
Simplify Managed Futures ETF.
“At the moment, the potential disruption to the world’s energy supply is huge,” said Remsing, adding: “The flexibility is greatly constrained given the prospect of AI pulling dangerous goods to the surface despite the inevitable shortage of molecules to deal with them.”
“Major-wise, the contribution from the long-term investment year to date is comparable to the contribution seen in March 2022,” said Yung-Shin Kung, head and CIO of Mast Investments.
“It’s worth noting that CTAs were generally losing money on energy exposure through February 2026, so the year-to-date exposure shows a gain since March, which is about 250% the size of the loss coming in March and similar to the size of the CTA’s gain on energy exposure in the first quarter of 2022 via email,” he told CNBC.
Beyond oil
Tom Wrobel, director, financial consulting, principal services and refining of Societe Generale, said that the oil gains are one part of a wider profit bonanza that powers the CTAs in 2026.
“There’s a lot of things going on — it’s not just one trend in one market,” Wrobel told CNBC in an interview.
Yung-Shin Kung said CTAs held the rally in precious metals, mainly silver and gold, earlier in the year, before shifting to industrial metals poised to benefit from AI infrastructure investment and supply constraints caused by the Iran war.
Meanwhile, Remsing said commodity-sensitive currencies such as the Norwegian krone, the Australian dollar and the Brazilian real also advanced as the de-dollar theme gained momentum and the euro weakened due to the war.
“Energy and oil markets in particular have gained after the Gulf war but it’s not like our gains are concentrated in that sector,” Remsing told CNBC in an email.
The future of gold.
Now, with oil prices showing signs of easing amid shaky peace talks, value models may now be reducing their exposure.
Doody said long positions in all energy markets have been reduced due to increased volatility and choppier price action, leaving CTAs with longer potential but less exposure than earlier in the year.
Fixed income remains more of a challenge, however, as yields have risen due to inflation concerns.
“CTAs on balance are short fixed income at the moment. The positions are broadly based across markets. While some of the largest short positions are in US Treasury futures, CTAs are mostly European, Australian and Japanese futures,” Doody added.
Wrobel said the administration will be closely monitoring the positions. “They’re not going to want to take big losses from bear markets – I think a lot of CTAs will be reducing their position sizes.”
That, in the end, is business as usual for CTAs, he added. “Capture trends as they emerge, and manage risks as they disappear,” he said. As volatility increases, managers don’t need to take large positions to meet return targets, Wrobel said.
In a note on Tuesday, Citi analysts pointed to “rich volatility premia” for gold, copper and soybeans, noting the difference between three-month and one-month volatility. In contrast, the volatility premium remains negative across the entire petroleum complex, they note.
Gaussel said the real downside for CTAs will be more volatile markets, as happened following US President Donald Trump’s “Independence Day” tax announcements last year.
“One sharp pullback can cause losses in that sector, but it may bring gains in other sectors such as equities or other assets, so it may not translate into losses.”
