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Funds exiting agriculture?

Agriculture.com Staff 02/06/2016 @ 3:18am

CHICAGO, Illinois (Agriculture Online)--Floor traders on the Chicago Board of Trade say the December rebalancing of hedge fund portfolios provides both buying and selling opportunities.

In mid-December, hedge funds, believed to be the largest single entity trading in the grain markets, get their first intent for money disbursement.

At that point, the hedge funds decide in which areas of their portfolios to reallocate their previous years earnings.


Usually, the commodity funds will be classified into different categories. One of the categories is commodities of financial-based instruments-metals that are affected by the currencies. Second, the material classification-copper, zinc, and lumber. Also, energy portfolios and renewable-food agricultural products.

Because one sector outperforms others, there will be profit-taking from a good performing fund and that money shifted into others.

For example, in last year's corn rally from $2.30 to $4.30, a lot of money was drawn out of corn and placed into other commodity funds.

Carlton J. Krumpfes, K-Commodities floor trader at the CBOT, says metals and crude oil were the recipients of a lot of the corn fund money. Thus, the all-time highs reached for gold and crude in 2007.

"So, the hot money comes out of a fund when it is hitting on all cylinders," Krumpfes says.

One might think if the going is good, keep the money in that fund as long as possible. Enter an entity of hedge funds that few talk about, 'funds of funds'.

"The funds of funds are charged with investing profit-money into as many different commodities as possible to create trading fees from individual investors looking for the next big thing," Krumpfes says.

As a result of their search, the funds of funds begin the wave of investors heading for that next big hot commodity.


In addition to generating trade fees while reallocating portfolios, hedge funds like to eject a commodity after too many people get on the same side of the market.

"Once the hedge fund establishes a trend, so many start to follow," Krumpfes says. "Then you get so much money on one side of the market. If the hedge funds have to get out, it's a nightmare. That is the concern right now. Producers should be paying attention to this."

This month, most traders think hedge funds will have to sell beans and wheat while they buy corn. In a daily newsletter, John Roach, Roach Ag Marketing, Ltd., says hedge funds will need to sell an estimated 70,000 contracts of wheat and 25,000 contracts of beans while buying 70,000 contracts of corn. "These are big numbers, so we can't ignore the potential impact of this 'rebalancing'."


For producers, the key to avoiding a hedge fund washout is finding downside protection for two years out or 18 months that doesn't cap profit potential, Krumpfes says.

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