Poor hedge funds. One minute you’re sitting on a bundle of cash and the next minute it’s gone - flown away like the Ospraie.
Since the announcement of Ospraie’s closure on Sept. 2, shares of commodities-related equities have continued a downward slide, as have the commodities themselves - copper, gold, oil, etc. There’s talk of other hedge funds unwinding long-commodities positions.
The WSJ’s MarketBeat has a good snapshot of the predicament facing investors:
… According to people familiar with the situation, Ospraie took short positions on commodities futures and long ones on resource equities - a bet that didn’t work out, because those stocks continued to decline.
`The options pricing implies that these stocks are not done making big moves,’ says Michael McCarty, options strategist at Meridian Equity Partners. `The people who want to buy them are sitting on their hands, saying, “Is Ospraie done and who else is involved?” They might be cheaper tomorrow.’
… This has also left somewhat of a vacuum. Those bullish on commodity-related shares did not expect those stocks to follow commodity prices as quickly as they did. By historical standards, many of the stocks in question are cheap, but that hasn’t drawn the buyers back in, yet.
All this means volatility (as measured by the VIX) is surging once again. In fact, only one indicator seems certain in the current market, and that’s the correlation between the US dollar and commodities, the strength of which is at its highest since 1967, according to Bloomberg, which quote “commodities king” Dennis Gartman:
“People have made it simple: as goes the buck, so go commodities,'’ said Gartman, the editor of the Suffolk,Virginia-based Gartman Letter, who correctly predicted in June that prices for gold and other raw materials would fall.“Commodities are being looked at as this new asset class that you use against the dollar. That means, if you don’t payattention to the dollar, you’re going to get slapped about rather soundly.'’
Of course, as the chart shows, commodities have been correlated with the USD for some time (being, as they are, mostly traded in dollars), but the strengthening of the correlation is striking. Greenbacks-a-go, then hedgies.
Related links:
What killed the Ospraie - FT Alphaville
