As well as trading forward freight agreements (FFAs), the fund will also invest in the physical shipping market both by chartering ships, and taking on clients’ freight delivery commitments.
The exposure to the physical market and the information flow that that will bring, will give the fund an advantage over derivative-only funds, managers Stuart Rae and Steve Rodley believe. “There are people trading just the physical side, and people dealing in just derivatives, but very few doing both,” notes Rodley. “But if you have the expertise we have there are a lot of advantages to trading both sides of the market.”
Rodley began his shipping career as a tanker broker in London in 1994, before moving to Mitsubishi and then BHP Billiton in 1999 where he was manager of Panamax freight operations. Rae became a ship broker in 1986 and founded shipping broking and consultancy GMT Shipping in 1991 with major Taiwanese freight traders and ship owners.
The fund will focus on the Panamax market initially, but they intend to “move fairly swiftly” into capesize and handy-max size vessels, Rodley says.
The fund’s strategy is to arbitrage the inefficiencies of the market, rather than take directional bets. “We wouldn’t hire ships because the price is going up – it’s all about arbitrage and volatility,” Rodley says.
Volatility on the Baltic Panamax Index has risen significantly since mid 2004. Annualised volatility is currently around 50%, compared to around 27% at the start of 2004. Time charter rates, however, plummeted from a peak of US50,000 per day at the end of 2004, to below $10,000/day by mid 2005. They are now around $30,000/day. A directional bet the wrong way could have been disastrous, but trading the volatility would have provided steady returns.
“We have broadly 10-12 strategies and we’ll employ them according to market conditions. Some strategies we might not roll out for six months,” Rodley says. “We want to be nimble.”
The number of ships the fund will have on the books will change constantly, but the managers wouldn’t expect to have more than 20 at any one time.
The managers says the FFA market has reached a level of liquidity they feel comfortable with. “The liquidity of the market has increased greatly in the last two years,” says Rae. For dates beyond 2008 and on certain routes liquidity is still an issue, but major routes have become liquid now, he says. Initially the fund will trade mainly the average of the four time charter rates in the Panamax market.
- Quant Finance Master’s Guide 2019
- People moves: SocGen adds in prime services, Deutsche fills new rates hole, HSBC makes model move, and more
- Cross-currency swaps could hasten RFR shift in Australia
- Podcast: Kenyon and Berrahoui on the pitfalls of PFE
- EU parliament OKs no-action powers but leaked doc signals delay