Hedge Funds

All aboard for hedge funds as trade tide lifts shipping

LONDON (Reuters) - Forced to abandon ship after mistiming their investments five years ago, hedge funds are venturing back in a bid to profit from growing global trade flows.

FILE PHOTO: A Guardia di Finanza policeman walks with his dog during an inspection of containers at Italy's biggest port Gioia Tauro, November 8, 2012. REUTERS/Alessandro Bianchi/File Photo

Around 90 percent of traded goods by volume are transported by sea and global shipping sectors, including dry bulk, are on course for a recovery this year after a near-decade long crisis, ratings agency S&P said in a report last week.

The IMF has forecast GDP growth at 3.9 percent for 2018 and 2019 versus 3.7 percent last year, which analysts say is boosting sentiment for shipping.

As a result, many hedge funds are loading hundreds of millions of dollars into the sector, putting behind them losses suffered in 2013 when, based on forecasts of improved world economic growth, they piled in to shipping debt and equity.

That strategy hit the rocks for many investors when the shipping companies they had put their faith in over-ordered new vessels and saw their shares fall by as much as 80 percent.

“They all came in too early,” Tor Svelland, chief investment officer at hedge fund Svelland Capital, said, adding that the market is different this time around as capacity is shrinking.

“It looks like the new building market will not be able to ‘kill’ the positive demand story. This is a dream scenario.”


This time round it is not only shipping stocks, but also freight forward agreements (FFA), which allow investors to take positions on freight rates at a point in the future, that are more widely used to get into what is still a niche sector.

For Demetris Polemis, a portfolio manager at $250 million Guernsey based hedge fund Paralos Fund, the tide is turning and with less chance of a shipping glut there are now “some interesting opportunities for investors”.

Another new feature are exchange traded funds which U.S. filings show are being set up to focus on shipping investments. These would allow hedge funds and retail investors to access FFAs, Polemis said.

“A lot of people have been talking about shipping recently. Last year, a few funds were setting up bespoke products,” said a London-based hedge fund investor.

One example is Tufton Ocean, a hedge fund and private equity firm, which started a long-only strategy run solely for a U.S.-based investor in January.

The wave of new money is clear from data last week which showed that hedge funds bet at least $675 million on shipping stocks in the fourth quarter of 2017.

Hedge fund participation in 14 of the top shipping stocks reached 29 percent in the fourth quarter, up from 23 percent in the previous three months, data from U.S. Securities and Exchange Commission filings compiled by Symmetric showed.

And activists, who buy up shares in undervalued companies and agitate for change to drive up the share price, have also been increasingly moving into shipping stocks.

Activist hedge funds made public demands of five shipping companies in the 12 months to Jan. 31, the highest number of campaigns in more than five years, with three in the previous year and two between Feb. 1, 2013 and Jan. 31, 2014, according to research group Activist Insight.


Duncan Dunn, senior director with leading FFA broker SSY Futures Ltd, said a number of investment funds started betting on dry bulk FFAs when the sector downturn started to bite at the end of 2008.

He said there had been an increase in the estimated underlying transaction value of dry bulk FFAs to $16.5 billion in 2017 from around $9 billion in 2016 and hopes that the underlying value could reach $24 billion if both volume and values grow by 20 percent this year.

“Last year’s improvement in time charter rates was such that not only will there be more hedging opportunity for dry FFA traders, but also a compelling case for renewed investment.”

For a graphic on freight derivatives volumes in focus, click

Elsewhere, the London-run Baltic Exchange, founded in 1744, is creating the possibility of its globally tracked main sea freight index, which gauges the cost of shipping dry bulk commodities including iron ore, grain and coal, becoming a tradeable instrument.

The Baltic is also looking into launching a freight index for LNG (liquefied natural gas), creating further scope for trading plays.

Such developments are likely to be a boost for those who caution against stocks as a way of gaining shipping exposure.

Nicholas Tsevdos, managing director of Ocean Way Navigation, a London-based shipping investor and asset manager, said shipping stocks are a particularly poor way in.

“This is due to the exorbitant combined G&A (general and administrative expenses) and management fees, which on average are around three times the market standard,” Tsevdos said, adding that the correlation between underlying asset values and the share price is often not as expected.

“You can watch a company achieve a phenomenal price for a vessel or fleet sale, and watch the stock tank as the market views it as a retraction,” Tsevdos said.

Others, such as Jens Rohweder, managing partner with German-based investment and asset manager Notos Group, say some markets such as dry bulk, which accounts for an estimated 18 percent of the world’s cargo fleet, may already be past their peak, leading him to prefer counter-cyclical investments such as LPG (liquefied petroleum gas) stocks.

“This will be the third time round for them (hedge funds), let’s hope they get the timing right,” one shipping industry source said.

Graphic by Alasdair Pal; Editing by Alexander Smith