The world is changing. The combination of the COVID-19 pandemic and a global recession has twisted the supply chains into knots. The fossil fuel industry, which has powered the modern economy for over a century, is finally yielding to a more sustainable future based on renewables. For a fourth time in the modern era, human civilization is going through an industrial revolution, transitioning from the digital age to the age of big data, and after more than a decade of low interest rates, currency debasement is on the rise.
All these inflationary forces have investors looking for something – anything – to generate returns and hold value over the long haul, and many are looking for the answer to the most serious challenge the wealth management industry has seen since the Stagflation era. My advice? Lean into the disruption.
Expanding the definition of “commodities”
Wealth management companies looking to use the current commotion to their benefit need to update their definitions of age-old concepts. Commodities, for example, are the building blocks of modern economies. But to identify opportunities in times of technological change, one must be able to peer into the future and see what technologies will dominate the landscape – and which commodities will be needed to make those technologies work.
That is why I am not too concerned with “commodity-picking.” We need to to expand our investable universe to encompass the digital economy, so when I look at commodities today, I am thinking about data as a commodity, about battery technology, about wind, water, and green energy technology. The commodities that will generate alpha for investors during a period of intense change are things like semiconductors, which are crucial to the operation of data centers, lithium, which is critical to cutting-edge battery technology, or natural gas pipelines that can be retrofitted for hydrogen, which is needed in the production of both green and black energy.
Rethinking the investment landscape
Aside from reconceptualizing the definition of “commodity,” it is also necessary to rethink what investing in commodities looks like. Even for things like steel and crude oil, pure commodity plays offer a high barrier to entry. But in the case of commodities like data or even water, there are no pure, plug-and-play ways to invest. Instead, my approach is to work back from our macro-insights and to use equities to express the opportunities we find. Not only is that a better way to generate returns – it also allows investors to control volatility and minimize their risk.
To do that, your tactics must be as advanced as your strategies. Index funds and passive strategies have enjoyed their time in the sun, but these funds assume that stocks only go up. Passive long strategies worked for the last four decades because the digital age and globalization were a rising tide lifting all boats. The beginning of a new age of transformation means there will be huge winners – and even bigger losers. That’s why no matter what you invest in, whether commodities, cryptocurrencies, or bonds, you must think bidirectionally and be prepared to mitigate the risk of double-sided volatility.
Embracing the “swarm”
One way to prepare for an uncertain future is to use an approach my firm calls “the swarm,” which was developed using the lessons of Big Data and machine learning techniques to simulate the power of the mob by mimicking the behaviors and strategies of investors and reducing them to quantifiable processes. At its core, the swarm seeks to internalize, formalize and automate many of the processes fund in fund or funds or multi-strategy hedge fund and prop trading firms. When building out an investable universe, picking and choosing commodities and equities is only step one. Step two is using swarm technology and algorithmic trading to allocate capital based on realized volatility throughout a portfolio, which allows us to bring approaches not typically available to the public to the table.
In other words: identifying winning commodities that will generate investment returns during an inflationary era is only half the battle. Just as oil powered industry over the last century, data will power it this century. That means “commodities” are everything from data centers, semiconductors, and the components and materials necessary to manufacture them. Climate change is leading to technological innovation in renewables, as well as water and food scarcity throughout the world – two classes of commodities that offer significant opportunities to savvy investors.
When the wind of change blows, some build walls, while others build windmills. The optimal path ahead for investors seems to be to do both.
Nikolas Joyce is Chief Investment Officer at The Strategic Funds, where he brings 20 years of experience designing quantitative investment research infrastructure and systematic trading platforms using leading edge technology.