Derivative Bets Gone Bad May Worsen Shipping Industry Woes

When it rains, it pours. Amazingly, the list of possible casualties from positions on forward freight agreements includes not only ship owners, traders, and charterers, but also hedge funds.

From the Financial Times:

Fears are growing in the shipping industry over the potentially big losses that could emerge this week on derivatives triggered by the October collapse in rates to charter dry bulk ships.

Since short-term dry bulk charter rates fell 71.9 per cent in October, traders and shipowners have worried that traders might be caught out by the speed and severity of the fall.

Traders in forward freight agreements – derivatives based on short-term charter rates – could owe significant sums if they were betting on a rise in charter rates for ships carrying coal, iron ore and other commodities.

The sector’s Baltic Dry Index of charter rates started the month at 3,025 points and closed on Friday at 851. The 80 per cent of trades made through clearing houses were being settled on Monday, while traders who bought cash-settled products through private transactions, known as over-the-counter trades, have until Friday to settle.

The many shipowners participating in FFA markets could also face losses if their market positions went beyond simply covering the market exposure of their actual ships…

Duncan Dunn, senior director in the futures division of London’s Simpson, Spence & Young shipbrokers, said the market’s rapid fall would have left anyone betting on upward movements needing to make substantial payments….

Market participants’ concerns have been heightened by the possibility of knock-on effects from failures of investors affected by FFA market losses.

If investors facing FFA market losses hand back ships they had chartered early to owners, the ships’ owners will earn considerably less than they expected. They could face problems servicing debt related to the ships.

Michael Bodouroglou, chief executive of Paragon Shipping, a Nasdaq-listed dry bulk shipowner, said that, even if a company had not participated in FFA trading itself, counterparties such as ship charterers might have done so. He said: “Company failures may cause a domino effect,” .

The market uncertainty stems partly from the complex chains of transactions in the market and the lack of clarity about different companies’ FFA trading.

It is widely expected that hedge funds could be particularly badly hit.

However, Philippe van den Abeele, managing director of Castalia Fund Management, a hedge fund specialising in FFA trading, said he expected hedge funds to experience bigger problems over speculative charters of actual ships.

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  1. Anonymous

    Great post, the media is finally catching up to the comments section. I remember EvilHenryPaulson making a long post a few weeks ago about certain naked speculators involved that caused the precipitous drop in the BDI so that captains now choose to idle in port

    This shipping coverage is what will form the macro story for the beginning of next year

  2. russell1200

    I wonder if I can find it, but I remember a few years ago (2005 I am pretty sure) a young hard charging B-school type posting a long article on why this was such a great area for speculation. An industry insider then responded with a long post as to why he was absolutely crazy and pretty much shredding him point by point.

    As I recall the B-school types response was to say something like: “thank you very much”.

    Which is a long way of saying that I am not surprised that hedge funds are going to loose money here.

    But there first concern is probably sweating out the over/under on Election day turnout.

  3. Jojo

    Ah, the interlocking relationships are amazing. I bet a chart would like spaghetti!

    Do hedge funds have anything more to sell to cover themselves? Gold?

  4. Anonymous

    Castalia Fund! I love it! FINALLY a fund with a
    literary name (from Herman Hesse’s Master of the Glass Bead Game) instead of Scylla Capital Management or Charybdis Equities.

  5. Been there

    Did the hedgies provide needed capital and liquidity to the forward freight agreement market in normal times- or – were they just unnecessary middlemen who opportunistically extracted profits, and inflated FFA market pricing, as they went along their merry way?

  6. Anonymous

    Amazing times. Of course this has always been an extremely volatile market which should, should, keep extreme leverage in speculation at bay. So the extent of the decline is amazing, but a certain high level of vol is always expected here. That’s my optimistic stab at it.

  7. Anonymous

    Anon 3:40

    I think this will be the big story before Christmas if Santa doesn’t bring our presents from China.

  8. Matt Dubuque

    Those who snickered and sneered at concepts I have used in this forum such as “hyperdeflation” and “deflationary burst” are well advised to watch this story closely.

    Not a time to buy gold.

    Rocket science to most Americans, but nonetheless true.

    Matt Dubuque

  9. El Sid

    There’s been a spectacular example of this already, in the sorry tale of Brittania Bulk Holdings (DWT), who called a bottom in the market in July and went crazy on FFAs, renting more ships, everything – they were a hedge fund masquerading as a shipping company. They went bust last week…..

  10. Matt Dubuque

    El sid-

    A 76% drop in the short-term price of shipping is but a snapshot of the key risk we need to manage, that of a hyperdeflationary burst.

    Matt Dubuque

  11. mxq

    Amazing that shipping companies actually extrapolated these rates far into the future and are now on the brink of bankruptcy (similar to NOC’s in the oilpatch).

    Like jojo said above, its scary how correlated assets classes have become…the theory that correlation spikes during crisis is proving more true than i personally ever thought, this time around.

  12. Anonymous

    dubuque says dont buy gold right now. is he truly aware of the FACT that the fed and ecb will do everything possible to stave off a deflationary, bank-collapse bust..with a fiat currency at their side, they have done everything and will continue to do so should deflation reppear. the budget deficit for next year is beginning to gain the awareness it deserves..its all over the news now. as it should be…but to say gold is not wise right now is insanity. you dont buy gold because its going from 750 to 1400 in the next six buy physical gold and only worry about its security..nothing else…not its price..its price is irrelevant.

  13. Matt Dubuque

    The term “fiat” currency is used a lot by Americans as if that somehow means that deflation is impossible in any nation with a “fiat” currency.

    Does Japan have a gold standard? How is the yen not a “fiat” currency?

    Did they experience deflation? Are they experiencing hyperinflation?

    Matt Dubuque

  14. Anonymous

    the japanese have always had the highest savings rate in the world..their people dont consume anything but food..they still save money with 0.5% sovereign interest rates. deflation is “doable” provided there is savings in place. the japanese also suffered their bust in the midst of the greatest increase in productivity the world has ever seen (internet, cell phones, slave labor globalized)..this is why they avoided inflation as did the rest of the world from 1988-2008…lastly, i would say that deflation is impossible with a fiat currency, long term…for 3-4 months, sure deflation can overwhelm the fiat world..but not for much longer…just look at how quickly and urgently the fed, ecb, other central banks have responded to deflation..

  15. Anonymous

    Dubuque is a moron. He talks about how he’s working on some dumb movie, but has yet to have anything to show. He constantly talks about how people should not buy gold, but in a situation where being cash heavy would be horrible against inflation, he provides no alternatives. I wouldn’t stay in cash for the very reason that the country is 10.5 Trillion in debt, that over 2 Trillion more will be added in 2009, that this country has a massive trade deficit(that is, we don’t produce anything that other countries buy), and the FED is printing out money like there’s no tomorrow to bailout banks so that they can lend us money today at interest.

    Food, guns, gold.

  16. Anonymous


    Have enjoyed this site now for two months now, the only other daily must read besides the FT. Why anon Nov 4th, 4:38 was included in your Recent Posts section is a mystery though. Matt Dubuque’s Youtube videos, though not widely viewed were made last spring and were prescient.

  17. Matt Dubuque

    In terms of a nation with a fiat currency only able to have deflation for 3-4 months, that does not square with the objective reality of Japan’s experience for the last 15 years.

    And with the soaring yen, they are faced with further (and much deeper) deflation.

    The claim that I have “offered no alternative” is simply false. I’ve stated for months in this forum that Treasuries were a screaming buy.

    I was right on the money. In DEFLATIONARY times, capital seeks the finest bonds, the most secure bonds you can find.

    That’s exactly what happened.

    I predicted this Crash in March of this year in excruciating detail in 13 videos for a film to be released in Sundance in late 2009.

    In all candor, I’m unaware of a single mistake in those 13 videos. I’m not tooting my horn, it’s just that some person made a personal attack (calling me a moron) and another mentioned my videos.

    A youtube search under “Crash of 2008” will bring them to your view. The video quality is INTENTIONALLY poor so that I can include no more than 6 minutes of them as archival “Forrest Gump” ancient footage in the film.

    Matt Dubuque

  18. Anonymous


    I bothered to watch the first few minutes of your video on YouTube. Your supposedly prescient call was as of March 2008 when Bear was melting down. That wasn’t prescient, it was consensus.

    And as for your ranting about gold, I suggest you get acquainted with facts rather than spout uninformed prejudice. Gold does MUCH better in deflation than in inflation. Yves even had some stats in comments earlier in the week.

    I suggest you not give investment advice when you have so little knowledge of the performance of various asset classes.

  19. SlimCarlos

    Matt Dubuque,

    >>In terms of a nation with a fiat currency only able to have deflation for 3-4 months, that does not square with the objective reality of Japan's experience for the last 15 years.

    Show me a case of entrenched deflation in a country under a fiat currency regime running massive external deficits. Just one.

    Japan is a red herring. Household savings were high (and growing) and they ran a huge balance of trade surplus. In other words, they weren't a supplicant to the rest of the world for funding.

    The US is dramatically different. Its government is broke. Households are broke. And, like some transient on a grate, it requires handouts from the rest of the world to clear each month.

    And you recommend buying its debt?

    But I digress: one other country that suffered deflation under a fiat regime running massive external deficits. Just one.

  20. Anonymous

    Sy Krass said…


    With all these problems, why the hell do shipping stocks keep going up? Are only insane poeple buying them? Or, just a bear market melt up?

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