Physical Commodities vs Buyside ER
I currently have an offer to join a physical commodity shop (Cargill/Dreyfus) full-time in the trader development program. I’m also currently interviewing at a well respected fund (LO) for a ER role. My end goal is to become a PM. I can see myself doing either fundamental equity investing (L/S or LO) or global macro. Which role would give me the highest chance of becoming a PM at a fund? I know that that the transition from a LO fund to a L/S fund might be difficult. I’m also not sure if I can internally work my way up to being a PM at the LO. I’m leaning towards the commodity role because physical trading because there is a possibility that I can get my own book, and I’ve also heard macro funds like commodities trading backgrounds.
Running a physical book is pretty different from L/S honestly. But a physical trading background would set you up well if you wanted to be an analyst at a natural resource L/S fund.
But if I'm being completely honest, haven't heard of too many people in physical going to HFs outside of very commodity-focused ones.
Thanks for the reply. Do you think that’s the case because physical traders tend to want to stay in physical or because the transition is difficult?
Probably a bit of both. I actually used to do equity L/S research and now am in physical. Much prefer the rhythm of physical but I guess it's closer to global macro which I am not in the absolute opposed to going into.
not to hijack the thread, but any resources you'd recommend to learn about the basics of the physical commodities space? for equities, there's the security analysis, margin of safety, ER reports, etc. what would the parallel be for physical commodities?
Book-wise I would say Oil 101 is a great first read. Not specifically about trading but gives you good insight into what all the potential sources of value for a commodity can be.
Then you have the historical stuff, Merchants of Grain, Metal Men... More academic, albeit outdated, Traders and Merchants by Chalmin was probably the definitive overview of the industry. This paper is a good update: https://www.diis.dk/files/media/publications/publikationer_2014/wp2014-…
People often mention the Trafi papers they put out to defend the industry. They are ok, but more in depth on the risk side is Czarnikow (sugar firm)'s 2018 annual report. Breaks down what risks they see to their business, applicable for any commodity really and gives a great breakdown of the things you could face.
Javier Blas from Bloomberg is working on a book, that could be a great primer once it comes out. More generally, the best content comes from various blogs. Kingsman on sugar, Jacques Simon on Genevan trade houses (very opinionated, don't 100% agree with him on certain things), there was a blog by a precious metals trader at Phibro whose name eludes me, really interesting, Simon Hill on LPG...
Could very well be wrong and if so someone correct me. But physical seems much more niche and cooler than ER.
Plus shops like Cargill/Dreyfus are huge and will have access to capital and will be around.
ER, very frankly is a low barrier to entry, highly commoditized business. Do you have access to annual filings (which are public?). Congrats! You can do a lot of the work most people sitting in HFs and LOs do (note I didn’t say you would do better). There is fee and margin pressure across the business, especially on the LO side, many more people (see lower entry barriers) which means more competition, and in general that means generally index hugging (or more often trailing post fees) performance.
How boring. What a grind. Physical (having never done it), seems to be more niche, fewer people, more in touch with the real economy, macro focused and frankly just interesting. I have definitely seen commodities guys go into macro funds though the drawdowns can be huge and the cycles (bull or bear) can be long and brutal.
I have only sat on the corporate investing/trading side of things having managed a cross asset book so my view will clearly be skewed and one can tell that I think most of it is blah boring.
Good Luck
I work at a LO in central research (equities). We place analysts and associates at L/S HFs constantly. It is also common to go to an internal fund. I personally would take the LO role. I would also add that in ER you most likely would get to build a track record which may help for a L/S role especially if you transition to the same sector.
This sounds right to me. I think for the vast majority of buyside roles, you'll be better off by starting in the buyside. However, there is a small possibility that the physical role could open up very specific buyside opportunities that would otherwise be unavailable to you if a bunch of other circumstances align, but that will largely depend on business need/how you sell yourself and how aggressively you look/what you've been doing at the physical shop. And besides not completely locking you out of HF, it also has the benefit, as you mentioned, of opening up a separate career path. All in though, it just wouldn't be common sense to join a physical shop if your stated end goal is PM.
Well put. Unless you want to become a commodities PM, not the obvious choice, but not a bad choice per se.
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