Freight Traders Luring Hedge Funds to Expand Market

Date: Wednesday, June 8, 2011
Author: Michelle Wiese Bockmann, Bloomberg

The new freight derivatives trading screen from the Baltic Exchange, a 267-year-old bourse that sets global shipping prices, will attract hedge funds and expand the $24 billion market, Citigroup Inc. (C) and Cargill Inc. said.

Baltex starts today after a three-year development and resistance from some brokers, who currently use phones to carry out about 95 percent of trading in forward freight agreements on future transport costs. It will improve pricing and attract more investors, said officials from Citigroup and Cargill, which have a combined 40 percent share of the FFA market.

Greater participation from hedge funds may help reverse the decline in the value of the market, which was worth as much as $35 billion in 2009. That mirrors the slump in freight rates as a glut of capacity overwhelmed the rebound in demand for commodities as economies recovered from the worst global recession since World War II.

“You will increase the number of traders, the number of positions, and ultimately you will increase volatility,” said Philippe van den Abeele, the managing director of Castalia Fund Management (U.K.) Ltd., a London-based adviser to a hedge fund trading shipping derivatives. The new platform may control about a third of the market 18 months from now, he said.

Shipping rates are already volatile. Returns for owners of capesizes, typically hauling coal and iron ore, gained as much as 60 percent and fell as much as 68 percent last year, according to data from the Baltic Exchange, which publishes daily rates for about 50 maritime routes.

Baltex executed its first trade and companies signed up to the system include Morgan Stanley and shipping hedge fund M2M Management Ltd., the Baltic Exchange said in a statement today.

FFA Prices

While Baltex will increase confidence in FFA prices, it will take time for volumes to expand, said Michael McGovern, a London-based commodities vice president at Citigroup, the third- largest U.S. bank.

“This expected growth in volume is very important to Cargill to aid the risk management of our increasing physical business,” said Andy James, London-based head of derivatives and the ocean-transportation unit at Cargill, the largest closely held U.S. company.

Cargill Ocean Transportation now operates more than 350 dry bulk carriers at any one time, according to its website.

Global trade in iron ore, coal, grains and other commodities will expand 4 percent to almost 3.3 billion metric tons this year, according to Clarkson Research Services Ltd., a unit of the world’s biggest shipbroker.

Regulatory Scrutiny

Some FFA brokers resisted Baltex, said Jeremy Penn, chief executive officer of the Baltic Exchange, which provides the indexes against which the contracts are settled. Work was halted in 2008 and resumed a year later because of demand from funds and ship owners and increased regulatory scrutiny of over-the- counter trading, he said.

Almost all FFA trading is done through brokers by phone, with about 5 percent on proprietary systems, according to Tom Cutler, chief analyst with SwissMarine Services. The Geneva- based freight trader operates 65 capesize vessels, he said.

The screen will cut down the need for traders to gather prices from several brokers at the same time, said Van den Abeele of Castalia, who is also head of a traders’ representative group at the Baltic Exchange.

Baltex has competition from Singapore-based Cleartrade Exchange Pte, whose screens giving prices for iron ore, steel, freight and fertilizer derivatives went live June 2.

“There will be more players in the market, and the players will be voting for their preferences,” said Professor Nikos Nomikos, who teaches shipping and commodities trading and risk management at Cass Business School in London. “You’re going to have a faster adjustment to the fundamentals.”

To contact the reporter on this story: Michelle Wiese Bockmann in London at