As volatility and price rises across the commodities sector are showing no sign of abating, hedge funds and banks are stepping up efforts to sophisticate their trading capabilities, much like the majors, corporate entities, trading houses and other key players in the value chain. This is exacerbating a scarcity of top-level talent across regional markets needed to cash in on otherwise unprecedented levels of uncertainties surrounding global commodities markets.
In 2021, hedge funds were already very aggressive in taking their commodities trading capabilities to the next level, which translated into increased hiring throughout most of last year. In the United States for instance, with the return of industrial and transport activity after COVID-related lockdowns eased, many switched their focus to develop light ends trading capabilities, after spending most of 2020 and early 2021 employing crude trading talent. Other hedge funds took steps to open brand new gas trading desks following the Big Freeze in Texas in February 2021 which sent gas and power prices to record levels due to power supply failures.
Such an appetite from hedge funds is persisting. In February 2022, hedge fund BlueCrest Capital embarked on a new hiring spree. The company was reported to have employed at least seven portfolio managers trading across various commodities. According to Reuters, the hedge fund hired its first metal-focused traders in April 2021. Since then, BlueCrest has continued to bring in several other commodities experts from firms such as rival hedge fund Millennium Management and commodities merchant Glencore. More are expected to join this year.
Similarly, there are signs that banks are looking to inject more cash in their trading operations, with some notable moves showcasing their return in the traditional commodities trading space. Since the start of the last decade, banks have notoriously shied away from the commodities sector after years of low returns and scandal-related losses. However, with commodities turning into one of the best performing asset classes in 2021, some banks like Goldman Sachs posted their strongest performance in a decade following the adverse effects of the pandemic in 2020. This is fuelling their appetite for greater exposure to commodities.
For example, US-based Citigroup recently hired veteran traders such as Mike Dunlap as head of North America oil trading. Dunlap was previously working as a senior trader for proprietary trading firm DRW.
More banks are expected to follow suit in the coming months amid a growing appetite to capture the benefits of increased volatility and liquidity.
Such a trend is intensifying the competition for talent with adequate skills and calibre to take advantage of current markets’ complexity, notably through trading new derivatives products and ‘paper’ contracts.
The global transition from fossil fuels to cleaner sources of energy is supporting demand for greener products and metals, while traditional products such as oil, gas and in some cases, coal, still offer attractive opportunities depending on regions and markets. Power trading is also becoming a lucrative exercise with the growth of renewables and real-time trading. Renewable fuels are another area of interest with some banks looking to develop agricultural trading capabilities in order to trade ‘paper’ contracts for soybean and other feedstock related contracts. This is in a bid to capture the benefits of volatility as the biofuels value chain is still consolidating amid greater interest from energy companies in greener fuels.
Against such a tight pool, smaller employers have struggled to compete with hedge funds’ ability to offer large guarantees and entice top-level talent. “Derivatives traders have had stellar bonuses over last two years, so it has been impossible to attract them unless one can buy them out,” said Jamie Tranter, Portfolio Director at HC Group’s Liquid Fuels Practice. “In some cases, derivatives traders have been deemed so priced out that smaller employers who don’t have the same balance sheets as hedge funds are having to be more agile in their hiring approach, looking instead at more junior profiles like trading analysts,” Tranter added. These would include smaller players looking to optimise their physical and asset-backed trading and hedging platforms against increased volatility.
The scarcity of talent also means that hiring processes have taken a long time, involving lengthy negotiations or candidates waiting for the right time to jump in anticipation of bonuses, and amid uncertainty surrounding the pandemic and its impact on volatility.
In this context, given growing competition to attract top talent, the level of work flexibility offered by hedge funds and trading firms has become a real differentiator for candidates. In addition to attractive compensation, remote working has allowed hedge funds to outbid vertically integrated and corporate entities for the appointment of portfolio manager roles. “There is limited scope to go back to office working, so working from their cottage in the Cotswolds or their ranch in Austin instead of Houston, wherever they may be, is going to be a big draw as well,” said Laura Berger, Director at HC Group’s Liquid Fuels Practice.
Increasing base salaries
The limited pool of suitable candidates, and the inherent need to retain talent, is not limited to trading units. As a case in point, Bank of America has increased the base salaries of its top-tier employees such as managing directors from $400,000 to $500,000 per year, according to a Bloomberg report in January 2022, with other directors and associates’ roles also seeing their base salaries rise. Associates were expected to see their base salaries increase to $160,000 from $140,000, according to the Bloomberg report. This is excluding additional bonuses which typically account for a significant portion of compensation received by employees in the finance, banking, and wider trading industry.
This is heralding more aggressive hiring strategies from banks and hedge funds. The current commodities super-cycle – described as a prolonged period of high prices across commodities like oil, gas, copper and aluminium – is largely expected to linger throughout 2022. This is illustrated by futures curves in several markets trading in backwardation, which indicates traders are paying significant premiums for supply in the short term.
Prices rose in 2021 primarily due to supply shortages, pent-up demand driven by the easing of lockdown restrictions, as well as geopolitical risks. But demand also remains underpinned by stimulus packages and increased demand for greener commodities due to the energy transition as previously explored by HC Insider. Goldman Sachs’ leading analyst Jeff Currie had predicted the scale of this super-cycle on an HC Insider podcast in early 2021. In January 2022, Currie said in an interview with Bloomberg that he had never seen commodity markets pricing in the shortage they are right now. “I’ve been doing this 30 years and I’ve never seen markets like this,” he was quoted as saying. “This is a molecule crisis. We’re out of everything, I don’t care if it’s oil, gas, coal, copper, aluminium, you name it, we’re out of it.” - FS
For queries related to HC Group’s activity and insights into talent demand from financial players, please contact:
Jamie Tranter, Portfolio Director at HC Group’s Liquid Fuels Practice in North America.
Doug Ferguson, Portfolio Director at HC Group’s Gas, Power and Renewables Practice in Asia.
Laura Berger, Director at HC Group’s Liquid Fuels Practice in Europe.