Hedge Funds Hit Hard by Commodities Investments


Slowing U.S. jobs growth, slowing growth in China, concerns about another global recession, and uncertainties relating to the Euro crisis, have turned commodities bulls into bears as hedge funds beat a hasty retreat from commodities for the third consecutive month, according to Businessweek (“Hedge Funds in Longest Rout Since Global Recession,” by Tony C. Dreibus).

This reversal in commodities demand appears to be part of a larger turning against alternative investments in general. Recently, hedge funds and many other alternative investments have underperformed expectations, and institutional investors have begun to worry even more about their high fees and illiquidity.

Hedge funds and alternative investments that have invested in or are linked to commodities in particular have taken a beating. Sentiment is now at its most bearish this year on copper, oil, heating oil, corn, gold and silver. Net long positions declined 26 percent in May, according to the article, citing the Commodities Futures Trading Commission. Europe, which accounts for 18 percent of worldwide copper and wheat demand, is floundering and the Euro reached a 23-month low versus the U.S. dollar on June 1st.

“When there’s concern about the global economy, you’re not going to be rushing into commodities, and end-users are going to be more cautious about buying,” said one money manager, who oversees about $170 million of assets, adding: “People are selling because they’re looking for liquidity and they’re nervous about the global economic outlook.”

Many investors seem to sense that they have nowhere to go except U.S. Treasuries, which are yielding next to nothing. “Investors are running scared,” another money manager observed, adding: “They’ve lost faith in equities and lost faith in anything that’s so-called higher risk. The money has to go somewhere. The general comfort level with holding cash is pretty low.”

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.