China Hedge Funds Defy Commodity Slowdown With Trading Boom

Chinese hedge funds are helping drive a commodity-derivatives trading boom in the world’s biggest energy, grains and metals consumer that’s defying the worst economic growth in 25 years.

Trading volumes across the Shanghai Futures Exchange, China’s biggest commodities bourse, surged 31 percent last year while activity on exchanges in Zhengzhou and Dalian grew by 29 and 10 percent, respectively. The expansion, compared with a 3.5 percent increase on the London Metal Exchange, is being driven by a growing number of investment funds nurtured by new regulations, according to Hu Yuyue, a professor at Beijing Technology and Business University.

“A registration is all you need to go out and raise money for your private equity or hedge funds,” said Hu, who studies futures markets. “It really opened a floodgate and therefore we saw an explosive growth in these institutional investors. They are increasingly corporate, professional and sophisticated.”

The surge in commodity trading contrasts with slowing physical demand. As the IMF predicts economic expansion will cool this year to 6.8 percent, China’s growth in oil, copper and steel consumption is forecast to decelerate. That’s not deterring hedge funds, which boosted the number of investment products across all markets by more than one third last year.

China vies for the top spot as the world’s biggest oil importer and gold consumer, and is the largest user of industrial metals and iron ore. The Bloomberg Commodity Index of 23 raw materials is little changed this year after a 17 percent slump in 2014 as oversupplies were met with weakening demand from China. Price Influence