Chinese hedge funds in aggressive short-selling strategy in copper, other commodities

Chinese hedge funds, once again linked to a powerful sell-off in copper this week, were probably replaying an aggressive short-selling strategy they have also used to target iron ore and coal, according to industry sources.

This indicates the growing clout of the secretive Chinese funds in global commodity markets as they tap their home-ground advantage in the world’s biggest consumer of copper and other commodities.

Chinese funds such as Shanghai Chaos Investment Co and Zhejiang Dunhe Investment Co are said by traders to be behind at least three big drops in copper in a year, one in March last year when the metal fell more than 8 per cent in three days.

Benchmark copper on the London Metal Exchange fell to 5-1/2 year lows near US$5,350 a tonne this week and was facing its biggest weekly loss in more than three years at 6.4 per cent.

Other funds involved include Flowinvest China Commodities Trading, Yihui Investment and Shanghai Discovering Investment, market sources said.

"It does make you sit up and take note. But given that’s where a lot of the wealth is amassing, should we really be surprised that we are seeing this type of fund activity continuing to grow?" said analyst Robin Bhar of Societe Generale in London.

"If you’ve got great market intelligence because you are based in China, then that almost gives you a head-and-shoulders advantage over somebody based in London or New York."

Traders and market sources said the funds aggressively sold one market on mainland domestic exchanges, going "short" in illiquid hours to trigger forced selling, while taking a long position in a related market, a strategy that has proved successful in iron ore, coal, rebar and copper.

"If a few have the same view and take the same position, then to some extent it’s self-fulfilling. It’s like a tidal wave and you have to ride the crest of the wave, otherwise you’re going to get dumped," said Bhar.

Assets under management at China’s private funds, some of which invest in both commodities futures and equities markets, had surged to 388 billion yuan ($62.5 billion) by December, according to China consultancy Z-Ben, up 69 per cent from the year before, with a total of 6,787 funds and money managers registered.

Shanghai Chaos is one of China’s seven biggest funds, with assets under management of more than 10 billion yuan. Some 12 companies account for about a third of the industry, according to Z-Ben.

Chaos trades equities and currencies as well as commodities. Founder Ge Weidong is known for his generosity to staff, providing canteens, gyms and beds. His signature on Weibo, China’s version of Twitter, is "My parents brought me into this world to invest!"

"Shanghai Chaos is just one man’s money. They made money on rubber, steel and iron ore," said a source at a fund familiar with Chaos and Dunhe.

"Now they’re buying iron ore and selling rebar. They’ll probably smash rebar against iron ore until the end of February. That’s their holding period." Chaos has 15 to 18 metal traders and 20 staff trading agricultural products, the source added.

Ge, a former trader at China’s vast state-owned agricultural

trading company COFCO, was slapped with a large fine by US regulators in 2012 after taking a $510 million punt and exceeding position limits on speculative bets in soybean oil and cotton futures.

Dunhe mainly invests in stock index futures and commodities futures from metals to agriculture. The team has about 50 people with about 15 focusing on researching strategy, according to a former staff member who declined to be named.

"They trade with high conviction, they trade six big trades and will hold it for eight weeks. It’s a smash and grab," said the first source.

As China’s funds grow firepower, they are looking to trade more on global exchanges, taking advantage of the greater liquidity available, said a source at a global exchange.

"They have studied a lot of the exchange rules and the regulations. They fully want to comply and they want to scale into an international player, but they don’t want to be visible at all."