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Chinese hedge funds set sights on commodities as stock volumes dry up

[SHANGHAI] Chinese hedge funds are moving into commodities after Beijing's steps to tame volatility in equity markets restricted trading activity in stock futures, fund managers said on Thursday.

China has unleashed a slew of measures to prop up its stock markets , that have plunged about 40 per cent since mid-June, and restricted trading in stock futures to crack down on "malicious" activities.

The latest interventions, effective from Sept 7, raised margin requirements and capped trading volumes, diminishing their appeal to active traders.

"We have cleared all positions in stock index futures lately and shifted all money to commodities since there are no other better options," said Liu Yancao, a senior executive with Beijing-based Quant Fund.

The fund, which manages about 300 million yuan (US$47.04 million), used to trade 60 per cent in stocks and 40 per cent in commodities, including petrochemical products, iron ore and other metals.

Iron ore volumes on the Dalian Commodity Exchange have surged to record highs in recent days just as stock futures volumes faded to all-time lows. Shanghai copper volumes have hit a two-month top.

While trading commodities is also difficult given weak prices and a slowing economy in China, the world's top consumer of most raw materials, it is attractive relative to equities and has prompted some funds to even change their trading plans.

"We were planning to trade stock index futures but we haven't even been able to start due to increased restrictions, so we are turning to commodity futures," said Zhang Xiaoxiao, a senior official with a unit of Leadbank Financial Service Group Co Ltd, which currently invests in treasuries and stocks.

The asset manager is looking to set up a commodity team by the end of 2015, highlighting the change in sentiment among Chinese funds that were previously cutting their exposure to commodities as prices, including that of oil, natural gas, coal, iron ore and metals, plunged to multi-year lows.

"Speculative capital has nowhere else to go but come back to commodities," said Wang Bing, a senior broker with Orient Futures in Shanghai. "I think iron ore could be the most popular contract for idled funds, as the physical market is huge."

According to a fund manager in Hong Kong: "Commodity is a difficult patch as well, but since there are many varieties of commodities, we can still find some trading opportunities."