Hedge funds and trading firms are piling into physical commodities markets in search of new sources of returns, despite lacking the decades of experience and information accumulated by established players such as Trafigura and Vitol.
Financial firms have a long history of trading contracts for power, natural gas and oil. But hedge funds such as Balyasny, Jain Global and Qube, as well as trading firm Jane Street, are expanding their operations to allow them to trade the underlying markets, deepening their exposure to global price swings.
This can involve buying the rights to transport natural gas over a pipeline, buying storage capacity for crude oil and storing electricity in advanced batteries before offloading it at peak demand times. Trading these markets can confer an informational advantage to market participants.