Coffee trading firm Eiger Trading Advisors has targeted a March launch for four funds suitable for investors that want to diversify their portfolio through access to coffee.
According to the International Coffee Organisation (ICO), coffee sales are unlikely to be affected by the current economic crisis, which has created a dire macroeconomic challenge, with job cuts, business shutdowns and poor returns on investments across pretty much all sectors.
ICO executive Nestor Osorio says that though the global economic outlook is still uncertain, available evidence suggests that the situation will not have a significant impact on coffee consumption.
According to Osorio, in North America, Europe and Japan, which account for about 58 per cent of world consumption, coffee represents only a small fraction of consumer spending, suggesting there are plenty of other areas of discretionary spending that could be cut before deciding to also cut back on this drink.
With regard to coffee production, the supply side of the price equation, Osorio said the effects would differ from country to country.
He said it was essential that coffee prices attain levels that are compatible with much-needed investments in future production.
Despite the impact of the economic crisis, Osorio said global coffee prices are showing signs of recovery after falling below $1 per pound in early December, with the ICO composite indicator price standing at 112.02 US cents per pound on 30 January compared with 126.69 US cents per pound in September 2008.
January recovery in coffee price
The Eiger funds aim to give investors exposure to the coffee markets through the choice of a hedge fund, a Shariah-compliant fund and two tracker funds.
The hedge fund, Coffee Alpha Fund, will trade physical coffee, futures and options targeting a 15 per cent return with 7 per cent volatility. It will manage long/short exposure to hedged physical purchases and sales.
The Shariah-compliant Eiger Green Coffee Fund will provide Islamic investors with access to coffee as an asset class. It aims for returns of around 12 per cent a year.
The two tracker funds, one long and one short, will follow the International Coffee Organization Composite Index. They will trade coffee through derivatives and futures.
The company decided to launch the funds based on its understanding of the coffee industry and the growers. This, the company said, will enable it to exploit trades and generate attractive risk adjusted returns for investors. The funds will target mainly Middle Eastern investors but will not limit itself to particular investors.
Eldred Buck, managing director of Eiger Trading Advisors, believes the funds offer many options to investors: "We decided to put together a product which we think will tick the boxes for all investors. Investors want exposure to commodities in different options."
"There is growing demand for physicals-based commodity funds, particularly within the agricultural sector," says Bart Mauldin, senior investment adviser at Eiger Trading Advisors.
"The family of Eiger coffee strategies represent an attractive opportunity to invest in a tangible and highly liquid asset type."
The funds will be domiciled in the Cayman Islands and will launch with approximately $150m collectively. The hedge fund will have approximately $1bn capacity and the other three funds will have a total capacity of $1 billion between them. The share class will be in dollars.
Laven Partners is providing consultancy and legal services. Eiger Trading Advisors acts as the investment advisor to Cayman Islands-based Eiger Asset Management.
Other providers have offered investors access exposure to coffee via ETFs, for example, ETF Securities runs three coffee-related funds.
According to Trustnet Offshore, only one of the three funds has performed well in the last year by successfully shorting against the falling coffee price. ETFS Short Coffee has gone up 35.8 per cent, while ETFS Coffee and ETFS Leveraged Coffee have returned -33.72 per cent and -61.32 per cent respectively.
Dow Jones-AIG Coffee Sub-Index 26 February 2008 – 26 February 2009
Source: Dow Jones, daily closing values
Offshore Commodity/Energy Sector performance
In future there may be demand from investors for other drinks-related funds, in particular funds offering exposure to tea.
Tea manufacturer Twinings, is part of Associated British Foods plc (ABF), a diverse international organisation with global sales of £8.2bn and 96,000 employees in 44 countries
ABF recently issued an update for its interim results to 28 February 2009, which highlighted good performances by its Twinings Ovaltine business division.
"Profits at Twinings Ovaltine improved again with strong growth from Ovaltine in developing countries but a slowing of the rate of growth of premium teas, particularly in the UK and US," ABF said.