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The blame game

With oil prices fast approaching USD130 a barrel and a global food crisis looming, the US Senate Committee on Homeland Security and Governmental Affairs is scrutinising the role of financial speculators in the commodities markets.

This week senators have been listening to testimony on how speculative investment by hedge fund managers and others may be contributing to food and energy price inflation.

Hedge fund manager Michael Masters, of Atlanta-based Masters Capital Management, argues that commodities prices are being driven up by institutional investors, including pension funds, sovereign wealth funds and university endowments, which are investing in commodity futures based on indices as a hedge against inflation.

Once again, hedge funds have been dragged in as an explanation for why certain prices are behaving abnormally. The fact is that speculators have always existed in the commodities trade, and investment from hedge funds – speculative or otherwise – is nothing new.

Could it not be that other factors are fuelling the boom in commodity prices, such as the weak dollar or increased demand of commodities from fast-growing emerging economies such as China or India? Not according to Masters, who told the senators: 'The increase in demand from index speculators is almost equal to the increase in demand from China' over the past five years.

Whether this is true or not, hedge funds can often be a convenient target even when the facts speak differently. An expert in commodities trading for a large investment bank claimed recently: 'It's not hedge fund money but the pension funds that have been investing in commodities for the past two to three years to diversify their portfolios.'

There is no doubt that the recent rise in commodities prices has been accompanied by a growing interest from institutional investors. But are hedge funds to blame for rising oil prices? So far the evidence looks fairly thin.
Source: Hedge Week

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