Pension & hedge fund commodity holdings soar

By Neil Behrmann

April 2008:- Hedge fund speculative bull positions in commodities have soared to $75 billion at the end of the first quarter 2008 from $60 billion in 2007 and $40 billion in 2005, estimates Citigroup.

These holdings were over and above commodity futures trading advisor longs of $94 billion at the end of the first quarter, up from $80 billion in 2007 and $60 billion in 2005. The majority of these funds are macro hedge funds, although there is a growing number of specialist commodity hedge funds.

Citigroup describes the flows into commodity markets as a “tidal wave of investment” that totalled $400 billion at the end of the first quarter compared with $330 billion in 2007 and $200 billion in 2005. By far the greatest proportion of the bull positions are holdings of commodity indices ($185 billion compared with $90 billion in 2005). These are the investments of huge pension funds such as CalPERS of California and ABP and PGGM of the Netherlands that purchase GSCI, CRB and other indexes via commodity swaps. Exchange-traded funds, or ETFs, accounted for $46 billion in commodity investments as of March 31, up 31% from $35 billion at the end of 2007 and $10 billion in 2005. ETFs track equity, bond and commodity indices. Both commodity indices and ETFs have outperformed CTAs and commodity hedge funds, as it has been a bull market.

Huge fund inflows behind extraordinary price increases

The surge in so called investment, but really speculation in commodities, has played a major part in causing an extraordinary price surge in commodities from oil, gold, copper to wheat, corn and sugar. Agricultural speciality hedge and traditional funds have also placed money in rice on the Chicago Board of Trade.  This has played an important role in soaring rice prices that are causing economic and political problems in Asia and other emerging markets.  Rising prices have caused panic hoarding that precipitated further increases.

The ``tidal wave'' of "investment" inflows is slowing, according to Citigroup.  This follows the sharp setback in prices mid March.  More and more so called "investment" money is needed to prop up current high prices.  One day the tap will be closed. "Investors" and other bulls will be forced to sell as prices begin to dip, but who will buy?

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