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Hedge Funds Take Risk Off Table, Defying Notion That Their Bets Are All That's Driving Markets
By GREGORY ZUCKERMAN May 17, 2006 Wall Street Journal extract
Despite the criticism being leveled at hedge funds for driving up commodity
prices this year, many of the large funds have actually been cautious, or
downright bearish -- costing them money in the process.
The prices of gold, copper, silver and other commodities have weakened this
week and energy prices have eased, so some of these skeptical funds and
other large speculative investors are seeing gains.
"A lot of macro hedge funds have taken a lot of the profit and risk off the
table in these markets, and some have shorted commodities," says David
Smith, chief investment officer at London-based GAM, referring to those
funds that make bets -- particularly bets on a price decline -- on global
trends. GAM invests about $23 billion in hedge funds. "The buying has gone
from hedge funds to individuals and others" in the past year, he says.
Prices of a whole swath of commodities have soared this year, leaving many
analysts searching for an explanation beyond growing global demand and
pressures on supply. The momentum for these commodities has sparked chatter
that hedge funds were jumping in and pushing prices even higher.
A number of hedge funds and commodity-trading advisers, or CTAs, have been
significant players in these markets, profiting by bidding these prices
higher, sometimes turning around their performances in the process. For
instance, John Henry & Co., a roughly $3 billion "managed-futures adviser"
in Boca Raton, Fla., has seen gains of about 14% in its largest fund, after
being down about 12% for the year as recently as February, according to an
investor.
But a look at some of the trading data suggests that while many hedge funds
remain bullish, they began trimming their holdings on some key commodities
months ago. For example, noncommercial investors -- a category dominated by
hedge funds and commodity-trading advisers -- held about 30,000 silver
futures contracts as of last week, or less than 30% of all open silver
contracts, in trading on the Comex division of the New York Mercantile
Exchange, according to the Commodity Futures Trading Commission. Those
positions include long positions minus short ones. That is down from about
45% of all open positions at the beginning of the year, and that means hedge
funds were cutting their bullish positions even as the price of silver was
soaring.
The same trend has been seen in other commodities. The net long positions in
gold held by large speculators amounts to less than 40% of all open
contracts, down from about 50% late last year. When it comes to copper,
there are now more bearish positions than bullish ones, even though copper
has doubled in price this year. Last March, their net long positions were
about 30% of all open copper futures contracts.
Speculative interest in platinum reached a peak in October and has come down
in recent months, while the interest in palladium is slightly higher today,
according to data from the CFTC.
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