A BRIEF HISTORY OF THE FUNDS
There is an old adage in the futures industry that for every hedge trade there is a speculative trade on the other side. Although a huge generalisation there is an element of truth in the saying. Consumer buying and producer selling rarely meet so it is the trade and speculators who help facilitate the trades.
A newly launched contract often struggles to gain traction because speculators do not participate until a certain level of volume and open interest is achieved. A failure to get to these critical levels is often the main reason for contract failure.
The far and biggest element of the speculative spectrum is the managed money funds. Nowadays there is a myriad of different types of funds. This has not always been the case.
Over 30 years ago, back in 1986, the Commodity Futures Trading Commission (CFTC) started to publish their Commitment of Trader’s reports. Initially the report was published every fortnight but this changed to every week in 1995. This was the first time traders and analysts were able to see how the open interest of all the major US agricultural commodity contracts was comprised. Initially, the report was ‘futures only’. There was no need for details on ‘Index funds’ because they did not exist.
The first report in January 1986 for Sugar No. 11 contract makes for interesting reading. As of the 15th January 1986 the total open interest was just 92,979 lots. The non-commercials (funds) were net 4,049 lots short. In that first year the funds did, at one point build a gross long position of 24,202 lots. Their largest gross short position was 11,818 lots. This is not too much of a surprise as, at the time, a large percentage of the funds were ‘long-only’. Just as a comparison, at the beginning of 1986 NY Coffee had a total open interest of just 13,335 lots and the funds were a measly 736 lots net long. At the time the larger trade houses were not intimidated by the funds and were often keen to take contrary positions. The number of active funds in commodities was limited with probably one of the best know being the ‘Mint’ fund run by ED&F Man which was the precursor to the formation of the Man group.
Fast forward 10 years and the sugar open interest had grown to 163,762 lots. Much of the increase in this OI was because of the growth of fund interest. At the beginning of 1996 the funds were net long of 32,839 lots. By now the fund’s’ influence on market movement had increased significantly. They were the largest traders in the market. The trade were now wary and respectful of the funds which meant the funds often dictated price direction, albeit in the short term.
By January 2009, the noisy open outcry markets had been silenced to be replaced by electronic trading platforms. The brash floor traders had been replaced by traders sitting quietly in front of screens. Trading had become instantaneous but anonymous. This suited the funds perfectly and their size, influence and control of the market had grown considerably. The open interest in NY Sugar by January 2009 had grown to a massive 666,642 lots, over seven times what it was 23 years earlier. However, the biggest growth had been in the fund positions. Their gross long position was 150,287 lots while their gross short position was 56,836. By August that year they held a net long position of 206,330 lots.
THE FAR AND BIGGEST ELEMENT OF THE SPECULATIVE SPECTRUM IS THE MANAGED MONEY FUNDS. NOWADAYS THERE IS A MYRIAD OF DIFFERENT TYPES OF FUNDS. THIS HAS NOT ALWAYS BEEN THE CASE.
14 | ADMISI - The Ghost In The Machine | November/December 2018
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