Trading and Analytics

Hedge funds lead the race for commodities trading talent

By: Proco Group

Sizable shifts are taking place in the commodities trading space, and we are currently witnessing a period of non-traditional growth.

Commodities trading is quickly becoming an attractive skill, as several recent events, from economies recovering from COVID-19 to unusual climate occurrences, lead to volatile markets.

The growth of hedge funds

As a result of market volatility, the expansion of derivative trading desks has emerged as the largest trend in commodities. So far, hedge funds and merchants with derivative exposure have benefitted from a profitable 2021. While this can be partly attributed to COVID-19, such a trend was inevitable. However, the pandemic did seem to speed things up.  

What is the reason for this shift? From the traders’ side, they are attracted to potentially lower seat costs that don’t take into consideration physical costs, lower credit limits, and additional liquidity to take on larger risk positions. As for the hedge funds themselves, we’re seeing them scale up their commodities trading desks with oil derivatives traders.  

Furthermore, merchants who do have capacity for physical trading are setting up hedge-fund like desks with strictly derivative trading teams, because there’s simply more opportunity in this area right now. By building out their derivative teams, these firms can create liquidity and capture volatile moves in the market better than they could with purely physical play.  

There have also been new entrants to the market. Macro hedge funds are expanding their trading teams by hiring specific commodity product traders. We have seen this shift in part due to the commodity super cycle trend but also in part due to inflationary risk created by monetary and fiscal policies put in place due to the pandemic, creating enormous opportunities within the commodity space.

New Extremes

Many aspects of the commodities trading space are responding to more extreme scenarios than seen before. This can be attributed to many factors, such as globally interconnected energy markets and the increased presence of real-time trading. This is related to the buildout of derivatives functions, which is less costly and therefore encourages more real-time trading. Furthermore, funds are moving to more collaborative team models and building deeper pods vs. solo individual traders.

Moreover, discretionary trading is back on the rise, as there has been an increase in uncorrelated fundamentals vs. price action. Dramatic weather events like the Deep Freeze in Houston as well as numerous hurricanes shutting down facilities have created logistical supply issues. These supply constraints coupled with the inflationary trade is driving an increase in demand for commodities. This is leading to large price rallies as the market has just experienced in Natural Gas.

Staying ahead of the game

As this movement gains momentum, firms will be looking to see how they can stay ahead of their competitors. There are a few ways to do this, but the key is understanding emerging trends.

It is important for companies to invest in analytics and data extrapolation. Markets are becoming more complex as they become globally integrated creating a trend towards sophisticated analytics. We have seen a hiring emphasis towards processing of various data streams have put high demand on analysts with macro knowledge and programming skillsets.

Another way to ensure a business stays ahead is to keep an eye on their recruitment processes. As the traditional scope of commodities firms starts to change, it may be worth the effort to expand the traditional talent pool as well. Traders with different backgrounds may prove instrumental as the market changes.

As the market currently stands, we have noticed that hedge funds are focusing on trading in the energy markets, as well as oil, gas, and metals. This is most likely because metals were heavily affected by inflation trade and are now being used to rebuild infrastructure, as well as for the push towards electric battery technology.

In terms of work habits, remote working pods are trending in new locations, furthering the ‘work from home/work from anywhere’ movement. However, new offices are popping up in more desirable locations for commodity traders as well – such as Miami, Denver, LA, San Diego, and Austin.

Having trouble determining the best framework to implement your vision of the future? Feel free to get in touch with myself or someone else as Proco Commodities. We make it our mission to find the best people, for your people. Be sure to follow us on LinkedIn to stay up to date with all the latest trends and developments taking place across the supply chain.