Dec

16

Hedgers, from Stefan Martinek

December 16, 2015 |

Information sometimes goes that the hedgers are net winners in a commodity game. They know their industry, they have great analysts, they have staying power, etc.

The opposite argument is that the large speculators having positions against hedgers are the net winners (at the end, they "sell" insurance to hedgers and should be compensated for such economic activity, on a macro scale).

Is there any evidence whether hedgers are taking money from the futures commodity pot or subsiding the game?


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4 Comments so far

  1. Django on December 20, 2015 6:13 am

    Its a very interesting question and i believe its simple answer is “its complicated”. When i think about hedgers i immediately think of them as longer term holders of futures (buying low/sell high crowd) & large speculators predominately CTAs/CPOs as medium term holders of futures (buy high/sell low crowd). I don’t think hedgers are subsidizing the commodity pot as 90% of the participants manage to loose irrespective of whether they are hedgers or large specs . My qualitative visualization process in terms of 2 general participants (not included broker/small spec/hfts) is as follows
    a)trending down hedgers are buying/large specs are selling
    b)trending up hedgers are selling/large specs are buying

    hedgers with the most staying power can ride out positions held against large specs meanwhile after a sizable one sided move large specs are bound to offset their positions and join hedgers in buying leading to a reversal and as prices moves in new direction large spec buy to cover & buy more for a new position from hedgers who sell it to them.
    large spec who will accumulate large position the fastest will win while slower large specs will loose as they will be trading against hedgers & faster large specs….
    That’s my naive theory after pondering over your brilliant question.

  2. Ed on December 20, 2015 3:40 pm

    It is a tug of war and depends on if Hedgers have an urgent need. The greater the need the more they contribute. The same “signal” when hedgers have no urgency or systematic need on one side vs. the other bleeds the speculator - Speculators are not needed in that situation, and when they don’t see it they are the contributor.

  3. Ed on December 20, 2015 3:44 pm

    On the other hand if the speculator has a need such as following a mandated program to keep “AUM” or the “allocator” or “client” when there is no valid situation of counterparty “urgency” they contribute to the market’s upkeep - there is no overlay in that situation. Ive seen in reading 10k reports of commodity processors is that they initiate “improved” systematic long term hedging after the horse of fear or risk has left the barn. If their underlying business model is threatened the premium can be huge, imo.

  4. gabriel on December 22, 2015 10:21 pm

    On a related note Vic, some time ago you made a comment about the market’s drift and the analogy with Bacon’s cycles, in that the entrepreneurs require a 10% return over the long-term and the public as a whole must always lose the vig.

    Intuitively it makes sense, and it’s hard to argue with Dimson et al’s data too, but my thinking breaks down when I try to define the parametres in the market model. At the racetrack we know who collects the vig and how, but what’s the equivalent in the market? The crowd selling to the point of 10% in expectation? But then how do you capture it if you held, since the new entry point is lower?

    Could you shed some light on this, or it was just an off-hand comment and I should stop wrecking my brain?

    Thanks,
    Gabriel

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