Commodity investors pulled over $4 billion out of the sector recently, according to several reports.
The main selling points of the sector—modest returns, diversification and inflation protection—didn't seem to be ring true. Instead, the indexes were delivering smaller, more volatile returns.
The S&P GSCI (formerly the Goldman Sachs Commodity Index), for instance, lost about 33% over the five-year period ending '12, when inflation had totaled roughly 6%.
Given that background, it seems like a lousy time to promote a commodities fund. Direxion Funds, though, disagrees.
Ed Egilinsky (left), head of alternatives for the New York-based organization, argues that the Direxion Indexed Commodity Strategy Fund (DXCTX)) can deliver commodities' historical portfolio benefits.
This is true, at least in part, because it's the only fund on the U.S. market that aims to match the performance of the Auspice Broad Commodity ER Index, before fees and expenses, Eglinsky says.
Many commodity funds take both long- and short-positions. A key feature of the Auspice index, however, is that it uses a long-flat strategy.
The goal of this approach is to take advantage of commodity prices when they rise, while also preserving capital by going flat (i.e., to cash) when prices fall.
According to Direxion, the investment strategy of the fund includes:
- A quantitative, rules-based index approach to commodity investing.
- Exposure to 12 commodities that can individually be long or flat.
- The ability to make position changes intra-month based on trends.
- A review of trends over short time frames, making it most responsive in the near-term.
- Monthly rebalancing based on risk reduction in which the allocation of individual components is reduced only if volatility exceeds certain predetermined risk levels, and
- A smart contract roll-yield approach designed to select the most cost-effective futures contract.
The historical results from this approach are encouraging, Egilinsky explains.
"What we've seen over the years is that [the Auspice Index] has been able to provide commodity-like returns with about half the standard deviation and about three to four times less the decline, maximum decline, than long-only commodity indices," he said, in an interview with AdvisorOne.
