From Commodities to Hedge Funds

Commodity firms have moved into bank-style activities, and without that pesky regulatory scrutiny:

Over the last decade, some of the world’s biggest traditional traders in grains, oil, and metals have quietly taken on many attributes of banks—running billion-dollar hedge funds, launching private equity arms, and selling derivatives to clients. These businesses enable trading firms to tie up large sums of money in bets and profit off insider information. Unlike the banks, these companies have escaped regulatory scrutiny—even though experts say they present similar hazards.

Take the grain titan Cargill. The largest private company in the U.S., Cargill has gathered and shipped a bulk of the world’s supply of wheat and corn for more than 100 years. Nowadays, however, Cargill also sells billions in derivatives to food companies, and runs two massive hedge funds, managing more than $14 billion for investors. Or take Louis Dreyfus, another major grain trader. In 2008, Dreyfus launched its own fund enabling investors to bet on food prices. By 2011, the fund had grown so fast it stopped accepting new money.

Trafigura, the third largest global trader of energy and metals, runs nine funds that together manage approximately $2.5 billion. Last year Glencore, a metals and mining giant, and Vitol, the world’s largest independent oil trader, financed a $10 billion loan for a Russian oil company. As businesses struggle to secure large sums from traditional banks, analysts say these companies could continue filling in for banks as a source of capital. Recently, some experts have also noted that extensive interlinkages between commodity markets and the financial system could pose systemic risks to the global economy.

"To the extent these companies [are] trading commodity contracts and selling investment products, they seem virtually identical in their scope of activities to the banks," said Marcus Stanley, policy director at Americans for Financial Reform.

Unlike the banks, though, most trading companies are privately owned, release scant information, and escape most regulation. Goldman Sachs and J.P. Morgan might obscure their commodity activities to the public, but they are still obliged to privately disclose them to the Federal Reserve. Firms like Vitol and Cargill, meanwhile, operate in near secrecy. They must register their hedge funds with the Securities and Exchange Commission, but no regulator sees the full stable of their businesses. The lack of rules around “insider trading” in commodity markets also opens a backdoor to manipulation.

Great.  Nothing bad can come of that.  As we've seen before, holding physical commodities and speculating on the futures of said product surely wouldn't screw producers, manufacturers and consumers.  On the slightly positive side, I figured a while back that considering how damn profitable they were, I'd go and invest in FC Stone.  If you can't beat 'em, join 'em.   Unfortunately, they'll screw me way, way more than I'll profit from them screwing everybody else.