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February 27, 2019  

Futures Shop Pursues Trade-Finance Strategy

Metals trader Commodity Asset Management is developing a new strategy that represents a novel approach to trade finance.

Instead of extending lines of credit to finance imports and exports, as most trade-finance businesses do, CAM would facilitate sales of industrial materials via repurchase agreements. The New York firm is seeking to raise perhaps $75 million for the business, either through a hedge fund or separate accounts, or both.

While details about the strategy remain under wraps, CAM apparently would work with middlemen that broker sales of industrial materials including metal ores and concentrates. CAM would purchase the material, arrange for transportation to a local port, then sell it to a middleman, while pocketing the spread.

CAM is targeting net returns in the high single digits, with little downside risk due to the fact that the transactions will be fully insured. The offering is attracting early interest from asset managers investing on behalf of insurance companies.

The trade-finance strategy is the brainchild of co-founder Nathaniel Polachek, who has invested in a half-dozen such transactions using his own money. The model was developed by an unidentified associate of Polachek who has executed some 800 transactions.

Polachek, a veteran futures trader and investor whose resume includes AQR Capital and Bridgewater Associates, is seeking deals requiring investments of $1 million to $5 million, or perhaps a little more. The repurchase agreements typically would have terms of four weeks. With $75 million of equity capital, CAM could execute dozens of transactions annually.

Polachek believes the new business line also will benefit CAM’s core strategy of trading metal futures by providing fresh insight into mine operators and the global supply chain. He currently uses aerial photography to monitor activity at more than 100 mines worldwide.

CAM offers its futures-trading strategy via separate accounts that have a combined $24 million under management. Those accounts have performed well, rising 9.5% year-to-date through mid-February, versus a 4% increase for the Invesco DB Base Metals Fund. Last year, CAM’s strategy produced a minus-2.5% return, compared to a 19.5% loss for the benchmark. In 2017, CAM’s accounts rose 18%.

The firm’s futures-trading strategy also is available in a hedge fund format via Kettera Strategies’ Hydra Platform.

CAM runs $27 million overall, including $3 million via a more-volatile strategy that combines futures trades with equity investments in mining operations. That vehicle was up 17% this year through mid-February.

Polachek started the business in 2016 with Jonathan Tulkoff, formerly a futures trader at Marc Rich & Co. Polachek serves as portfolio manager, while Tulkoff oversees operations.

Polachek previously spent about five years at AQR, where he headed commodity, currency and derivative investments in Europe. In that role, he developed models that guided a large volume of the firm’s trading in metal futures. Polachek earlier worked at Spectra Financial, GFI Group and Bridgewater. He began his career as a trader at Goldman Sachs.