Ouch, comments on commodity hedge funds

“As with most mature businesses, commodity hedge funds are finding profitability harder to come by. The sobering truth about the nature of commodity futures may have re-emerged: they are not investments at all but risk-shifting instruments, always generating a loss for every gain.” 

Commodity prices are down and the expected inflation has not materialized around the world so there has been an exit from commodity hedge funds. The comment from the FAO suggests how unloved commodities are right now.

Unfortunately, the comments seem to be very off-centered and biased. Commodity markets, like all derivative markets, are a zero sum game with a winner and loser. They have always been a risk-transfer mechanism. The job of the speculator is to find where the hedging need is and take the other side for a profit. It may not always be described as such but providing an alternative to hedgers is one of the key purposes of these players. There has also been controversy about the type of risk premium in the commodity markets. Clearly, the risk-shifting in these markets creates a time varying premium which means that commodity hedge funds have to be dynamic in nature. 

It has been a difficult market with large price declines in many markets,. macro RO/RO trading, and periods of strong volatility. This is the environment that hedge funds have had to work in and they have not done well. Beyond the obvious current performance issues we would be hard pressed to state that the reign of commodity hedge funds is over.