Hedge Funds Reduced Commodity Long Bets due to Sandy and Elections

Hedge funds reduced their exposure in commodity markets for the week ended 3oth October as uncertainty in the presidential elections and hurricane Sandy kept markets thin.

Data reported to the US Commodity Futures Trading Commission (CFTC ) showed a 11% drop in 18 major commodity contracts. The data is reported to the commission on a weekly basis showing open interest in major markets.

Amit Mehta, Partner at Anello Asset Management an Asset manager and physical commodity trading house in London said “with presidential elections coming to a close and the effect of hurricane Sandy low volumes and price spikes were inevitable.”

Hedge funds have been swinging back and forth over the last eight months as the global economy keeps traders alert, earlier this year, in April, hedge funds reduced their positions by around $9bn in the week ended April 10. The reduction came on the back of a slowing Chinese economy.

The movements are complemented by the market looking for key figures in oil and gold. Gold is yet to retrace back to the all-important $1800 mark and Oil is struggling to recapture the key $120 a barrel level.

Crude Oil (WTI) is trading at $84.99.

Crude Oil (Bret) is trading at $107.45.

Gold (spot) is trading at $1,715.03.

The recent figures show that hedge funds and other money managers reduced their commodity exposure by 126k contracts to 1,566k during the week ending October 30. In monetary value the nominal exposure, taking price and positioning change into account, fell by almost $10 billion to $117.5 billion with the metal sector again the biggest casualty as it saw a reduction of $ 4.5 billion.

Martin Arnold, Senior Research Analyst at ETF Securities says “Hurricane Sandy shut US exchanges last week, leading to a decline in trading in all asset classes, including commodities. Uncertainty over the US presidential elections and the key US nonfarm payrolls data released last Friday also kept investors on the side-lines”.

Commodities have been hampered by various factors putting pressure on the global economy, the Chinese economy was seen to be suffering with manufacturing figures taking hits, and this was continued by European elections and the much awaited QE3.

Naveed Siddiqui, CEO of Mathamax Markets (PVT) Limited, a systematic research advisory firm in Lahore advised their clients to minimise exposure, he says “we encourage

low-frequency trading strategies that are fundamental based, therefore any major news affecting the markets is a hindrance for us and our clients”.

Commodities are seen as safe haven instruments, Gold has favoured the most as the US dollar and US Equities are still trading below their pre- credit crisis prices. The Dow Jones hit a high of 14,000 in July 2007, accompanied by the S&P 500 and NASDAQ all hitting 6 year highs (2007).

Analyst’s at the largest investment banks are bullish on Gold, the market expects the precious metal to hit $2000, Bank of America Merrill Lynch had expectations of the metal peaking in Q4 of 2012.

Alex Ivanov, CEO of FX Rebate Gurus, saw a decline in their client’s commodity exposure last week, he says “our clients trade on sentiment, the market had already factored in the forthcoming difficulty and we saw massive reduction in client volumes trading in gold and oil”.

Gold has pulled back slightly post Obama's second term confirmation, October FX trade volumes continue to show the market suffering.