* Crude oil, base metals may benefit if U.S. economy expands
* Managers avoid gold, silver as rates rise, USD strengthens
* End of QE3 may herald return to more varied performance
By Claire Milhench
LONDON, July 11 (Reuters) - An end to U.S. monetary stimulus may not necessarily spell doom for commodity prices if a strong U.S. economic recovery boosts demand for oil and base metals, leading commodity managers say, but gold and silver are to be avoided.
Commodities sold off heavily in June following signals from the U.S. Federal Reserve that it would wind down its stimulus programme, as long as the U.S. economy continues to improve. The shift in direction led to investors dumping bonds, a sharp rise in real interest rates and a stronger dollar - all of which clobbered commodity prices, particularly gold.
The average actively managed fund in the Lipper Global Commodity sector was down 9.58 percent last quarter, and very few actually made money. Commodity prices as indicated by the Thomson Reuters-Jefferies CRB index fell 6 percent in the second quarter, with big moves down in gold and silver.
The best performers were market neutral funds, which aim to deliver stable returns whatever the market weather, and funds that can take both long and short positions, which made money when prices tumbled.
These managers are phlegmatic about the second half, but for long-only funds, the picture is less reassuring given the headwinds from a stronger dollar and uncertainty over Chinese credit growth.
"If you have sustained good economic news or not, then you have a direction for commodities either way, and a trend is likely to form," said Jon Spencer, president at Gresham Investment Management.
"Whether prices go up or down, our strategy will do well, but long-only funds have to hope for a sustained period of economic growth for commodities to perform." The Nuveen Gresham Long/Short Commodity Strategy Fund topped the Lipper league table last quarter with a 1.76 percent return.
Spencer said if the Fed feels confident that it can slow the pace of its bond-buying, this implies sustained employment gains, a stronger economy, and a pick up in demand for economically-sensitive commodities such as energies and base metals. More people will be driving to work, consumption will pick up, and businesses will expand.
His fund is holding long positions in crude oil and oil products, and has just gone long copper, although it remains short aluminium, nickel and lead. Likewise, short positions in gold and silver initiated in the middle of last quarter have been maintained.
But China poses a bigger question - if it decides to slow credit growth to keep a lid on inflation, this will hinder commodity prices. "China is a big importer of most commodities," said Spencer. "That could offset potential price rises in industrial metals and energies. It's not a straight line."
Commodity managers find choppy markets hard to trade - they prefer strong, persistent trends that allow them to build positions before the trend reverses. For this reason, Brian Ziv, co-manager of the William Blair Commodity Strategy Long/Short Fund, which came fifth in the Lipper league table, believes an end to stimulus is not necessarily a bad thing.
"If quantitative easing eases, if Chinese demand for commodities slows, or if Europe falls back into recession, then commodity prices may continue to fall," he said. "From our standpoint, steadily falling commodity prices may prove more profitable than the erratic movement that has characterised commodities over the past few years."
Spencer agreed that until there is a clear direction for the global economy, volatility will continue to spike periodically. The Fed now seems divided on when to end its stimulus programme, adding to the confusion for managers, and Japan, Britain and the rest of Europe aren't out of the woods yet.
However, Lorenz Arnet, founding partner at InCube Capital, whose market neutral Commodity Relative Value Fund came third in the Lipper table, believes that most of the negative news is now priced in.
In addition, an end to the Fed's programme, which has lifted most commodities in a "risk on" trade, may mean a return to commodities trading on their own supply and demand fundamentals.
"We expect higher dispersion among the individual commodities than we had during the risk on/risk off market (experienced under QE)," said Arnet.
Credit Suisse's Nelson Louie, global head of commodities in asset management and Christopher Burton, head of portfolio management in commodities, also see fundamentals playing more of a role in price direction after a long hiatus.
The CS Commodity ACCESS Strategy Fund came ninth in the Lipper league table, partly on the back of short positions in wheat and corn, which were pressured by plentiful supplies, and an overweight position in lean hogs.
"Lean hogs was one of two major commodities that rose during the quarter, increasing 7.02 percent amid tight near-term supplies and strong seasonal demand," the fund said.
If the market adjusts to a slower pace of global growth, the fund sees supply divergences such as these playing an increasing role at a time when the higher correlation between other asset classes and commodities seen since 2008 has begun to decline.
"This may enhance the diversification properties that commodities offer and may signal a return to a more fundamentally-driven market," the fund said.