Got cocoa? Maybe, but probably not much. Finance junkies have watched the price of cocoa futures skyrocket for months and some have even learned a smidge about agricultural policies in the producer nations of West Africa. Whether you’ve missed the move (or only felt the heat in the price of your chocolate milk), this is one of the biggest finance stories of the year. Most folks are more likely to know about the spectacular advance of Nvidia shares: the chipmaker has been banking coin on the back of the AI gold rush. 

Investors have been checking their portfolios and calling their advisors, hoping they own at least some Nvidia (“got chips?”), and odds are they do: either in index funds or with active managers that track, mimic, or closet-stalk some index or another. Few individual investors have participated in this less-visible but remarkable rally or “hedged their cocoa liability” by (say) stocking up on their favorite bon bons. However, investors in one particular family of strategies may indeed “got cocoa (sic).” According to a manager we visited recently:

“Cocoa was the portfolio’s strongest performing market as prices soared more than 60% on fears that extreme weather and climate change will exacerbate a global supply shortage. The move was so extreme that the profits in cocoa accounted for more than a quarter of the portfolio’s return in March, despite a relatively small position.”

And here’s the best part: this manager’s strategy–known as Trend Following or Managed Futures–will have long exited its position in cocoa before the price tumbles back to earth. It may even make money on the short side as it does!. All based on trading rules implemented by a computer that doesn’t feel fear, greed, envy, or weakness from low blood sugar. Investors in index funds, on the other hand, will ride the rollercoaster as long as Nvidia is a listed company. Discretionary stock pickers have to rely on [guesswork and luck] their immense predictive powers to know when to buy and when to sell.

Should you have cocoa in your portfolio? Today? Two weeks from next Thursday? In a year? Should you have exposure to Trend Following or Managed Futures? In this life, there are many hard questions and an occasional easy one. At Magnolia we welcome your questions!

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^{* Efficient Capital Management Monthly Performance and News Report, April 12 2024}

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