Dynamica Global Investments : Dynamica Commodity Trading Strategy

Summary

Dynamica believes that volatility has returned to commodity and financial markets. This is typical of the five to six year cycle. We expect additional and sustained volatility over the next few years. This is very beneficial to a disciplined investment and risk management process. At the same time, the commodity markets have seen an exodus of participants, due to poor returns and/or risk management. This has created a rich, less competitive environment for stronger players. Availability of data and data analysis tools has increased rapidly over the last few years, so a well-designed process harnessing technological solutions can provide an investor with a significant edge.

Investment Strategy

Dynamica has developed what it believes are efficient quantitative techniques, including those that interpret fundamental and proprietary data in the context of price impact. This is then combined with Nikhil Dhir’s many years of commodity and macro trading experience to analyze themes in the markets. Portfolio construction is heavily focused on long-convexity and each trade is sized systematically to limit excessive drawdowns and volatility. Dynamica devotes as much effort to risk management as to the investment process.

Risk Management

Dynamica believes that to successfully navigate the commodity markets, you need a combination of experience, contacts and a well-designed investment and risk management process. Dynamica’s manager has experience working at a bank in euqity derivatives and fixed income, a bank commodity desk, a commodity merchant and a hedge fund, so he is well-versed in how participants approach the physical and financial markets, both mechanically and psychologically. As a relatively low win rate trader, it is important for us to maintain the risk reward skew and positive expectancy in the strategy. This involves having a capital allocataion strategy, and the discipline to follow it. As a manager looking to deliver high convexity, a variant of the Kelly system of betting is the ideal choice.