Bullish hedge funds flock back to commodities

Reuters: Bullish hedge funds and speculators returned en masse to commodity markets in the week to Tuesday, putting on about $5 billion worth of long positions, a major change after their massive exodus in September, data showed on Friday.

Led by renewed investments in crude oil and heating oil positions, the funds, also known as “managed money”, made their biggest increase in net long positions since the end of August, according to Reuters calculations based on the U.S. Commodity Futures Trading Commission’s weekly data.

Total speculative holdings in 22 markets rose by 8.7 per cent to 847,000 contracts in the week to Oct. 18, the first increase in seven weeks. The value of overall net long speculative holdings rose to $67 billion.

The positive flow came during a week when prices were relatively flat, with the 19-commodity Reuters Jefferies CRB Index up by just 1.4 per cent.

The index fell to its lowest in a year in September, but initially, hedge funds appeared to have little interest in picking up cut-price commodities, with inflows in the week to Oct. 11 a meagre $850 million. But they raced back in the following week, perhaps encouraged by improving U.S. indicators and signs of hope in the European debt crisis.

Still, commodity holdings by short-term funds is still at half its August peak after September’s rout, when they slashed their net long holdings by $42 billion over four weeks.

Hedge funds were not the only ones racing for the door. Longer-term institutional investors, most of whom do not buy directly into the futures market, cut almost $10 billion worth of positions last month, according to estimates by Barclays Capital. It was the largest outflow since at least 2009.

“All indicators seem to suggest the strong momentum earlier in the year has turned more cautious in recent weeks, aggravated by concerns regarding European sovereign debt have, threatening the growth outlook for the euro area and contagion effects worldwide,” Barclays analysts said in the report.

The single largest weekly increase occurred in the heating oil market, which saw an inflow of $2.1 billion as bullish funds doubled their net longs for the biggest one-week increase since January 2010. The approaching winter season is typically the strongest part of the year for the heating fuel.

Crude oil followed with a $1.2 billion flow, followed by gasoline, soybeans and sugar at just over $800 million. The increase in sugar length was the biggest since December 2009.

A number of markets suffered a very small decline in net long positions with natural gas and gold both seeing out-flows of more than $500 million. Most other positions were little changed on the week.

The notional figures are calculated by Reuters based on the change in net positions from a week ago, multiplied by the contract’s value at the end of the period. Because most investors trade commodities on margin, the drop in the value of positions is not directly equivalent to total divestment.

The total value of holdings is only a fraction of the amount of investor capital estimated to be allocated to commodity markets worldwide, much of which is invested in over-the-counter contracts, physical exchange funds or credit notes, or via banks, which are part of a different CFTC group.

According to Barclays estimates, total assets under management in commodity markets amounted to $393 billion at the end of September. It said the third quarter was the most volatile ever for investors flows amid jittery markets.