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Chinese hedge funds cut exposure to commodities

[SHANGHAI] Previously linked to short trades causing dramatic falls in metals such as copper, Chinese funds have cut their overall exposure to industrial commodities, seeing little prospect of momentum either way to pounce on, industry sources say.

Zhejiang Dunhe Investment Co Ltd, which according to traders manages more than 10 billion yuan (US$1.61 billion), had virtually suspended trading in metals since early July, said a source familiar with the fund.

A senior official at the fund said trading commodities was"difficult now", but declined further comment.

"Investors have lost confidence in the stock market, but commodities are even more difficult to get high returns," said Li Wenjing, an analyst with Industrial Futures in Shanghai. "With prices already too low, investors taking more short positions may lose money, while prices are not expected to rebound for longs."

A 60 per cent rally in Chinese stocks beginning last year tempted funds to increase their bets on equities, but some have been burned by a 25 per cent tumble from the June peak.

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China's slowing economy has also hit commodities with the Thomson Reuters core commodity index down 13 per cent so far this year.

Another fund, Shanghai Chaos Investment Co Ltd, has backed off trading in metals like copper as well as petrochemical products in the past three weeks, though it recently invested in Dalian iron ore and Shanghai rebar futures, the source said.

Chaos could not immediately be reached for comment.

Chinese funds have increased their clout in global markets in recent years and were said by traders to be behind big falls in copper, one in March last year when the metal fell more than 8 per cent in three days, and again in January this year when copper slid almost 8 per cent in two days.

But indicating a drop in bets against metals, open interest in Shanghai copper dropped more than 40 per cent in late July from a year high of 416,396 lots on Feb 2.

Open interest of Shanghai rebar slumped 66 per cent on July 15 from this year's high of 3.93 million lots in April.

A manager with a small-sized Chinese fund established by several partners said it had allocated 20 per cent of assets to commodities last year, but had cut this to zero.

One area still being looked at is agriculture. Chinese funds are considering long positions in corn, soy and palm oil in the next few months, aiming to benefit from any crop damage from an El Nino weather pattern, fund sources have said.


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