A bi-directional approach

Calculo Capital CEO, Philip Engel Carlsson, is not a cheerleader for the super cycle story: “Betting solely on a commodity super cycle is, in my opinion, not the most effective strategy. Predicting the start of a super cycle is extremely difficult, and even if you get it right, timing the exit is just as crucial. Without careful timing, you risk giving back all the gains. That’s why a flexible, bi-directional approach – capitalizing on both upward and downward trends – offers a more balanced and effective way to navigate the complex dynamics of commodity markets”.  

Since 2018, longs have contributed more profit than shorts, but Calculo is agnostic about long and short positioning: “I feel strongly about educating my investors about the limitations of a long-only approach to commodities. To truly capture the potential of the commodity markets, you need to participate in both directions – long and short. Unlike the stock market, where a company’s growth often leads to an increase in stock price, commodities operate on different dynamics,” explains Carlsson.

He highlights how commodities are physical markets where fundamentals matter: “In commodities, price fluctuations are heavily influenced by supply and demand. For example, if soybean prices rise, farmers will allocate more land to soybeans, increasing supply, which eventually drives prices back down”. 

Inflation

Inflation can be most relevant for a long only approach to commodities whereas Carlsson expects to extract alpha from commodity markets regardless of the inflation climate: “As we are long/short with a short-term focus, we are not that focused on the “inflation play” as we focus on delivering pure alpha across all periods. We therefore do work as an inflation play per default, but are not limited to this scenario,” points out Carlsson.

All weather commodity alpha

The strategy appeals to those seeking all weather alpha from commodities. Says Calculo Capital board member, Henrik Henriksen: “With a long background in financial markets, including over a decade as Chief Strategist at Denmark’s second-largest pension fund, PFA, and later at Velliv, I have focused on asset allocation from a practical perspective. One of the biggest challenges is that traditional assets like stocks and bonds perform poorly during periods of rising inflation. This is where diversification, particularly in commodities, becomes crucial and is something Calculo excels at. In 2022, while equities and bonds struggled due to inflation, Calculo delivered strong results. Additionally, Calculo provides solid returns even when commodity prices move sideways or decline, solving the challenge of long periods of low or negative returns, a common issue with traditional commodity investments. Philip and the team at Calculo have cracked this code”.

Carlsson explains where and how Calculo fits into portfolios: “Our investors typically view us as a dynamic commodity and CTA strategy, combining trend following techniques with a systematic approach to capitalize on opportunities across multiple markets. Many also categorize us within the absolute return space, recognizing our ability to deliver consistent returns regardless of broader market conditions. This diversified positioning makes us a valuable addition to portfolios seeking non-correlated returns and effective risk management”.

The shifting climate for trading commodities

Carlsson has traded commodities for over 20 years and reflects on how the environment has changed: “Currently commodity trading presents both challenges and opportunities. Factors like geopolitics, green energy transitions and deglobalization have added complexity and create more frequent and sharper trends with more reversals. Our ability to adapt quickly to these evolving dynamics and capitalize on both short- and long-term trends sets us apart”. Geopolitics, green energy and deglobalization forces may seem like long term megatrends, but the feedback loops of policies and responses, such as sanctions and countersanctions, or attacks and counterattacks punctuated by peace talks, can generate faster moves as well.

Shorter term moves

“New market participants can impact the pricing of the markets, making it more reactionary and making it difficult for longer term CTAs to hold on to their profits,” says Carlsson. Calculo follows trends with lower volatility and is also able to participate in shorter term moves. For instance, it has taken small profits from energy and cocoa markets in 2024 without getting caught up in their large and violent reversals.

In contrast to some CTAs, cocoa has not made an outsized contribution to Calculo’s returns in 2023 or 2024. “Due to our strict risk policy, we do not chase market hype. We did enter a long position in cocoa, but due to our model’s methodology we only traded in certain price windows and only obtained a small fraction of the overall order. As the cocoa market is well known for its pull back volatility, we did not chase the market and therefore did not fully capture the performance in cocoa. Cocoa posted its largest drawdown in 60 years as reported by Bloomberg. We viewed a pull back as high probability and therefore did not scale into it. Our short-term focus enables us to lock in profits and dampen the profit give-back,” explains Carlsson.

Sometimes Calculo can profitably trade reversals but does not expect to catch every single one: “We were not directly affected by the initial pullback in gold but benefited from the correction in June 2024. In general, rapid reversals are not ideal for our strategy, as our core model and philosophy are built around capturing directional moves followed by stabilization, where our AI-driven models look to take profits,” says Carlsson.

Opportunistic allocations

There is no fixed allocation to any commodity market. “Our risk allocation has been dynamic, adapting to prevailing market conditions. When energy markets have provided strong signals, we’ve participated more actively in this sector. At other times, we’ve increased exposure to metals, grains or soft commodities. We remain flexible, adjusting the portfolio to capture the most promising opportunities across all commodity groups,” explains Carlsson.

Performance attribution correspondingly varies between markets according to the opportunities. “Energies and softs have been our key performers this year, followed by grains. Metals has not been a profitable group this year. In 2024, the best individual markets have included crude oil, cotton, corn and gasoline, while the worst included soybean oil or platinum,” points out Carlsson.

High hit rates

Calculo’s return distribution is very different from a traditional trend following CTA. Instead of a low hit rate and a high win loss ratio, there is a high hit rate around 70% and a fairly symmetrical distribution of profit and loss with many trades making or losing very small amounts near zero.

Stable universe

Calculo concentrates on major liquid commodity markets and has neither added to nor deleted from their universe of 20 major markets since inception. “We stick to the markets we know, and we know the dynamics and volatility of these markets by heart. We are open to adding markets but given the volatility we currently stick to what we know and markets we have followed for the past 20 years,” says Carlsson.

Calculo keep abreast of but do not trade Chinese contracts: “We closely monitor Chinese markets as they play an increasingly important role in global commodity trading. While we don’t trade them directly, they are key indicators for global trends, especially in metals and energy. We may consider trading them in the future if we see a stabilization of regulation and improved market access,” says Carlsson.

Marginal model evolution and refinements

Proprietary software is important for trading, risk management and execution, and models continue to evolve marginally: “We continuously enhance our trading and risk management systems to stay ahead of the curve. Recent refinements include more sophisticated risk controls and advanced technical indicators that improve our ability to identify and act on trends. Our proprietary systems enable us to execute trades with precision and manage risk dynamically, ensuring that we maximize returns while controlling exposure,” says Carlsson.

Selective use of Gen AI

Carlson explains how AI is being used for risk management but not yet investment signal generation. “We are using Generative AI in many aspects of our operations. We are also looking into uses for our investment models. We have not yet however mapped how we can best benefit from this. We have since our launch in August 2018 used AI/ML as a risk management tool, as we can benefit from this technology to identify adverse market movements and thereby deliver our less volatility commodity product. Using Generative AI on price prediction and trading signals is more of a black box and can take paths which could prove outside our risk parameters and style. But it is interesting. I do believe at some point we will add it as an extra layer, but we are not there yet.”

Cash, vehicles and counterparties

In July 2024 the Fund was earning interest around 3-3.5% in DKK cash, which can often be 50-60% of the Fund. Currently the Fund is Danish Krona-denominated, and the DKK is closely pegged to the Euro. There is potential to obtain lower management fees for larger allocations.

Calculo is open to broadening its suite of brokers and other counterparties.

Calculo Capital Chairman Klaus Rud Sejling sums up: “Calculo Capital’s success reflects our unwavering commitment to rigorous risk management, innovative strategies, and a deep understanding of market dynamics. Being recognized as the best-performing fund over 2 and 5 years is a testament to our team’s dedication and our focus on delivering consistent value to our investors. Calculo should be part of any investment portfolio, uncorrelated with traditional assets, and offering low risk and proven solid returns”.

With 15 years of executive experience at Maersk in strategy and investments, and now CEO and co-owner of DANX Carousel Group, Sejling brings extensive leadership experience to Calculo Capital. His global expertise in logistics and his role as Chairman and co-owner of Calculo Capital make him a strategic force behind the future growth of the firm.