Sharp falls in commodity markets are offering great opportunities for hedge funds, according to Singapore-based start-up Four Elements Capital, but the overall hedge industry is still set to shrink as redemptions accelerate.
Lionel Semonin, chief investment officer at Four Elements, which plans to launch its first fund in December, told Reuters there were opportunities both in areas that had been oversold and also in valuation differentials between commodities. "The current deleveraging doesn't reflect fundamental value. Commodities are not trading at the fundamental values we'd see them to be," he said.
"Market dislocation has also created some opportunity to trade in different type of commodities, including agriculture and metals. We can also see relative value opportunities in one commodity sector versus another." His comments come as the global wave of deleveraging hits commodity markets. The price of copper for three-month delivery has fallen more than 50 percent since a record high of $8,940 in July, while corn has dropped from nearly $8 a bushel in June to just over $4 now.
However, Semonin said the overall hedge fund industry, which has dipped to $1.7 trillion in assets due to market losses and redemptions, is set for further tough times as clients withdraw more money. "There have been a huge amount of redemptions - about $40 billion in September, and (it) seems like a lot more in October. There are still some tough times ahead," he said.
"Banks have been important partners and supporters of hedge funds, and the bank crisis is going to create a lot of problems for hedge funds. There will probably be a shrinkage in the hedge fund industry." Last week Britain's Financial Services Authority said hedge fund managers were "weathering the market turmoil pretty well in the circumstances".
Nevertheless, the industry shrank 11 percent during the third quarter as investors pulled out a record amount of assets. Four Elements, set up by five former London-based investment bankers, has moved to Singapore because of the efficient regulatory framework, Semonin added. "(We wanted) ... to start trading sooner rather than later, and here the framework is very efficient to start hedge funds relatively quickly."
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