Hedge Funds Raise Bets on Commodity Rally to Highest Level in Four Years

Date: Monday, December 13, 2010
Author: Chanyaporn Chanjaroen, Bloomberg

Hedge funds and large speculators increased their bets on a commodity rally to the highest level since at least 2006 as copper and gold gained to records.

An index tracking speculative positions in 20 commodity futures in the U.S. advanced 8.4 percent from the week before to 1.54 million contracts as of Dec. 7, the highest level since at least February 2006, Commodity Futures Trading Commission data show. The gauge, compiled by Bloomberg, is derived by taking short positions, or bets on lower prices, from long positions.

Commodities tracked by the Thomson Reuters/Jefferies CRB Index advanced 11 percent this year, extending a 23 percent gain in 2009, on demand led by China and as investors bought raw materials as a store of value. Cotton soared 85 percent, silver 73 percent and arabica coffee 54 percent. Hedge funds and institutional investors will put more money in commodities next year as the world economy recovers, Barclays Capital said.

“The current economic environment is clearly positive for risk assets like commodities,” Yingxi Yu, an analyst at Barclays Capital in Singapore, said today by phone. “Talk of a double-dip or a recession seems to be fading away.”

About 76 percent of respondents surveyed at a Barclays’s conference last week in New York predicted a bigger inflow into direct commodity investments next year. New investments this year were $50 billion, the London-based bank said.

‘Cheap Money’

“We see most commodity prices moving higher in 2011 as global economic growth, at an above-trend 4.2 percent, bolsters demand,” Morgan Stanley analysts led by New York-based Hussein Allidina said in a report dated Dec. 10. The bank is “most constructive” on crude, copper, gold, corn and soybeans, it said.

Near-zero interest rates in the U.S. and increasing money supply in leading world economies have attracted investors to commodities, said Mark Pervan, head of commodity research at Australia & New Zealand Banking Group Ltd., by phone today from Melbourne. U.S. Treasuries returned 5.6 percent this year, according to Merrill Lynch & Co., and the MSCI World Index of equities gained 7.6 percent.

“The key driver is cheap money that’s parked in high- returning assets like commodities,” he said. “A tipping point would be when the Fed starts raising the rates. That’s when we will start to see a big correction.”

Copper, Wheat

Speculative long positions in New York-traded copper outnumbered shorts by 26,432 contracts in the week ended Dec. 7, a 25 percent increase from the week before, CFTC data show. Wheat speculators repositioned for a price increase, holding 8,488 net long positions, a reversal from 19,372 lots of net shorts a week before, the data show.

Hedge-fund investments in agricultural, precious metal, oil and copper derivatives totaled $160 billion this year, a record according to data compiled by ANZ. Of the current total, 75 percent of the bets are long positions, Pervan said.

Hedge funds are largely unregulated investment vehicles whose managers can trade any asset, aim to make money regardless of whether markets rise or fall and participate substantially in profits from money invested.

-- With assistance from Luzi Ann Javier in Singapore. Editors: Matthew Oakley, Jake Lloyd-Smith.

To contact the reporter on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net