Systematic investing works best in crisis: JWH

NEW YORK (Reuters) - The credit crisis has shown that trend-following investing works in the worst of situations and trading on fundamentals is good if one can survive market volatility, a hedge fund invested in commodities said Tuesday.

"In evaluating whether or not fundamentals matter, you really need to be in a somewhat stable environment and right now, emotions are driving a lot of what's happening," Ken Webster, president at J.W. Henry & Co, told the Reuters Investment Outlook Summit in New York.

Trend-following commodity funds such as JWH, which use computer-plotted trading models to systematically invest in the energy, metals and agricultural markets, have seen stellar returns this year, even as the broader hedge fund industry suffered heavy losses.

JWH, which invests in commodities as well as stocks and financial futures, has posted a 69 percent return for the year on its World Commodity Portfolio and almost 50 percent on its Financial and Metals Portfolio. Non-systematic hedge funds are down about 20 percent on the average, industry data shows.

Webster said the credit crisis has exposed the weakness of investing purely on fundamentals and taking the long-only approach in commodities simply because prices of raw materials were rallying recent years.

"Fundamentals can always be disputed. It's like that old saying, 'if you have enough money and you can last long enough, you will always be right,'" Webster said.

"If you had made a call for a 10-year rally in commodities and you can withstand the drawdowns and changes in the market, you could end up being right. But at the same time should you miss an investing opportunity on the downside move for your clients? That's what you need to ask yourself."

He said price forecasts could always go wrong and pointed to crude oil as a case.

"We rode the long side of the crude trade all the way up until $140. When you had crude up at $140, you had more people predicting it will go up to $200. That's the danger you get into, especially in a crisis period like this, where people will start to lay in their own forecasts and predictions on where it's going," Webster said.

"We now have a $20 low forecast for crude for next year. The president of OPEC is so worried, he says he's going to shock the market. There are so many variables at play here."

Likewise, in the case of base metals, although aluminum prices were at 5-year lows and copper at 3-1/2 year lows "they could continue to drop another 25-30 percent", Webster said.

"It's a dangerous position to say 'now's the time to actually buy something,' when you can see clearly that the trend and the overwhelming majority of people are actually shorting or staying short."

This did not mean that trend-following commodity funds, which are also known as Commodity Trading Advisors or managed futures firms, always make money.

"We had a difficult period in 2005 and 2006, when everything was so stable," Webster said. "Range-bound markets don't work for us. This year, the trends have been long in duration and high in magnitude and that's something that's typically worked incredibly well for us."

Webster said in the 27 years that JWH has operated, he recalled five crisis periods when the fund did best, returning in excess of 50 percent.

(Additional reporting by Steve James; Editing by Tom Hals)