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From Kirsten Bischoff, Opalesque New York: At the end of November Bloomberg.com reported that hedge funds have raised their cash holdings to an average of 31% of assets from 7% in the previous two years (Source). Expectations for hedge fund redemptions now continue into the first quarter of 2009, but when managers decide to exit cash positions and enter back into the market, where will they look?

There is speculation that oversold commodities are likely where hedge funds will focus. After a six year-bull run, depressed markets and deep outputs have turned the tide, driving commodities down through the second half of 2008. “The subsequent severity of the decline in commodity prices surely has a lot to do with index speculator liquidation,” Jeff Korzenik, Chief Investment Officer of VC&C Capital Advisers told Opalesque.

While long-speculator liquidation has taken prices low in the second half of the year, false signals (from “paper demand”) in the beginning of 2008 prompted high levels of supply just as physical demand was falling, and Korzenik expects that restoring balance to the underlying physical markets will take some time.

However, it remains to be seen if balance will be restored or if the “bubble” will start growing again. Hedge funds may be looking at oversold commodities, but they are not alone. ......................

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