Funds Ship Out in Search of Returns
Some Hedge Funds Recently Are Betting Freight Rates for Shipping Are Set to Soar
Hedge funds seeking big returns are heading for the high seas.
Ospraie Management LLC and Vermillion Asset Management LLC are among the funds that are betting freight rates for shipping are set to soar as global demand for everything from iron ore and coal to grains and sugar increases. Some investors argue that, in coming years, there won't be enough ships to accommodate the growing need for transport, a situation that is likely to push freight rates higher.
Managers such as Louis Dreyfus Group are even starting new funds dedicated to shipping rates.
"There's strong demand, and you don't have the ships," said John Kartsonas, a portfolio manager who oversees freight investments for Vermillion, a commodities hedge-fund firm with $1.1 billion under management. "For the next two years, there's not a lot of things you can do to bring this market back to balance."
Vermillion, which is majority owned by private-equity firm Carlyle Group, recently boosted its exposure to freight rates on expectations they will rise this summer and through the second half of the year.
Money managers can bet on the direction of freight rates by buying and selling futures-like instruments known as forward freight agreements, which are largely traded over the counter. It is a murky market prone to some big swings, an attraction for funds seeking volatile markets to juice their returns.
Rising interest in the $15 billion freight market is yet another illustration of investors' willingness to dive into risky and volatile financial instruments as they seek bigger returns. Freight rates collapsed from record levels after the 2008 financial crisis as a drop in demand for commodities collided with the delivery of many new ships that were ordered during the boom times of the early 2000s.
Just this year, freight rates—tracked by the widely watched Baltic Dry Index—have plunged 59%. Rates as tracked by the index would have to rise 12-fold to regain their precrisis peak.
The market also is affected by more than the health of the world's economy. Rates tumbled this year in large part because of the cancellation of several soybean cargoes from the U.S. to China, as well as a ban by Indonesia of nickel exports.
But bullish investors say the latest setback to rates is temporary amid stable, albeit sluggish, global growth.
The Baltic Dry Index reflects freight rates for four different types of vessels plying 23 routes. Some of those rates are showing increasing gains, signaling that a bottom has been hit already, some analysts say.
Since the start of 2014, rates for the largest cargo ships, called "Capesize" because they must pass the Cape of Good Hope or Cape Horn to make their way between oceans, averaged $14,300 a day, according to Baltic Exchange Ltd., a London company that provides maritime-market information. That compares with an average per-day rate of $5,600 in the year-earlier period....MOREHT: Barron's Read this, Spike that column
