Hedge Funds Push Into Commodities Despite Losses

Commodity hedge funds delivered disappointing returns in 2025, averaging just 2.2% through November, significantly below the overall industry average of 10.7%. The poor performance stemmed from volatility in energy and agricultural markets driven by geopolitical conflicts and trade policy uncertainty.

However, the sector is attracting renewed interest from major investment firms seeking diversification. Physical commodities trading—which requires actual receipt and transport of goods—is emerging as a key strategy for 2026. Firms including Citadel, Millennium, and potential entrant Point72 are expanding operations, hiring specialized traders, and acquiring energy assets despite the challenging environment.

Commodity traders faced a difficult environment throughout 2025, trailing most other asset classes. According to hedge fund research firm PivotalPath, the average commodity hedge fund gained only 2.2% through November, compared to the overall industry average of 10.7%.

Multiple factors contributed to the underperformance:

• Geopolitical volatility: Conflict in the Middle East caused significant price swings in oil markets
• Trade policy uncertainty: President Donald Trump's tariff policies and their uneven implementation led to fluctuations in crop prices, particularly soybeans
• Energy demand uncertainty: The rapid expansion of AI data centers has drastically changed electricity demand forecasts, leaving top investors unsure about future market conditions

Even prominent managers struggled. Pierre Andurand's fund, one of the world's largest commodities managers, suffered drawdowns exceeding 50% in the first half of the year on cocoa-related trades. Citadel, which distinguishes itself through natural gas trading and its commodities unit, lagged rivals in its flagship fund for most of the year—a rare occurrence for the industry's most profitable fund in history.

Millennium's commodities branch, led by former Goldman executive Anthony Dewell, lost several senior portfolio managers during the year, though specific returns for the unit remain undisclosed.

The poor performance has not deterred expansion plans. As assets grow at multi-strategy firms with roots in quantitative, equity, or fixed-income trading, the need to diversify into additional asset classes increases.

Citadel has been particularly active:

• Acquired German energy trader FlexPower
• Added senior traders in Australia
• Purchased Paloma's natural gas assets in the Haynesville Shale region for approximately $1 billion
• Renamed the acquisition Apex Natural Gas, fully owned by Ken Griffin's firm
• Apex recently bought additional natural gas assets from the energy company run by billionaire Dallas Cowboys owner Jerry Jones

Millennium is backing new commodities hedge funds based in Paris and Singapore while continuing to allocate capital to external teams.

Other firms making moves include:

• Point72: Steve Cohen has informed backers that the firm may expand into commodities soon
• Balyasny: Operates offices in a Danish port city for physical commodities trading
• Jain Global: Allocated 13% of risk to commodity trades as of mid-year
• Verition: Hired several energy-trading portfolio managers
• Qube: Opened its first U.S. location in Houston, a major energy trading hub
• Squarepoint: Expanded into physical metals trading

Physical commodities trading represents a strategic shift for firms that once focused on more liquid, electronic markets. Unlike standard financial instruments, physical commodities require buyers to actually receive, hold, and transport goods—a complex operation that was traditionally reserved for specialist funds competing with trading desks at major banks and energy companies like BP and Shell.

Industry data firm With Intelligence reports that "physical commodities will be the biggest diversification play in 2026 as both larger firms and start-ups hunt for alpha that quant approaches cannot easily access."

The report further explains the appeal: "Multi-managers sell themselves as a dependable source of low-beta returns, and the inefficiency of commodities markets, particularly at this time, is seen as a great way to generate diversified alpha."

This strategy allows firms to capitalize on market inefficiencies that automated trading systems struggle to exploit, particularly in markets requiring physical infrastructure and specialized knowledge.

The commodities sector appears poised for continued expansion despite current challenges. The combination of market volatility, geopolitical uncertainty, and the need for portfolio diversification creates opportunities for firms willing to navigate the complexities of physical trading.

Key trends to watch include:

• Increased allocation from multi-strategy firms seeking non-correlated returns
• Growth in physical trading infrastructure and specialized hiring
• Continued expansion of quantitative firms into commodity markets
• Potential regulatory and policy impacts from ongoing trade negotiations

While 2025 proved challenging for commodity traders, the strategic importance of the asset class appears to be growing among hedge funds looking for differentiated sources of return in an increasingly efficient financial landscape.