I am a part of the team which is responsible for management and hedging of commodities exposures. Some say corporates are good only in following advice from banks or brokerages. I do agree corporates do not have market insight of a bank. But here is a problem. It is not bank or broker or a hedge fund that has biggest risk that markets will go against them. These guys always have an option to do nothing and wait for a better trading opportunity where as we don't. We have to continue to purchase commodities, spend currencies for daily business. Such company is always exposed to changes to market price even if it decides not to hedge. In fact my company has probably one of the biggest short commodities portfolio in the world. Managing such risk effectively is a challenge. It is like being between a rock and a hard place. You get your behind kicked all the time be senior management, whether it was a missed opportunity to hedge or hedge that turned to be out of the money. Critics will say if you lost money on your hedge then you probably bought it cheaper on physical market. let's face it, nobody wants to loose money, full-stop.

So I do not have an option to do nothing as I am always in the position (short in this case). I think people like me have higher motivation to earn positive return on their portfolio then other players. In fact my intention is to bring hedging to a performance benchmark of proprietary trading.

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Tuesday, May 4, 2010

Are we commodity traders?

I don't think so. over the last two years I personally went from a commodity trader to a trader of everything else. Simply because market environment changed to a global "risk on / risk off" trading. While in the beginning people had difficulties accepting it (including me), smart ones quickly accepted the rules of the game. Macro trading dominates these days for most of the assets ignoring individual fundamentals. Here is an example of 4 hours correlations of some commodities, currencies and equities for the last 120 trading days:



over the recent days more short term correlations broke down. But until above values hold we continue in a macro trading mode. So companies with significant commodities exposure have to follow equity, interest rates, forex markets as well.
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