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The Journal of Alternative Investments

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Hedge Funds, Volatility, and Liquidity Provision in Energy Futures Markets

Michael S. Haigh, Jana Hranaiova and James A. Overdahl
The Journal of Alternative Investments Spring 2007, 9 (4) 10-38; DOI: https://doi.org/10.3905/jai.2007.682734
Michael S. Haigh
The associate chief economist at U.S. CFTC in Washington, DC.
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  • For correspondence: mhaigh@cftc.gov
Jana Hranaiova
A senior economist at PCAOB in Washington, DC.
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  • For correspondence: hranaiovaj@pcaobus.org
James A. Overdahl
The chief economist at U.S. CFTC in Washington, DC.
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  • For correspondence: joverdahl@cftc.gov
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Abstract

The role of speculators in derivatives markets has been a source of considerable interest. One large category of speculative traders, hedge funds, has drawn considerable attention in recent years. Much of the attention has focused on the concern that hedge funds exert a destabilizing effect on these markets, which may ultimately lead to higher trading costs. Employing a unique dataset consisting of trader positions in U.S. energy futures markets, this article analyzes trading relationships between hedge funds and other groups of traders (e.g., hedgers and other speculators). Results show that on average hedge funds do not change their positions as frequently as other groups. Results also show that, on average, changes in hedge funds positions are triggered by position changes of other trader groups. The article finds that hedge funds are an important source of liquidity to the other participants and the hypothesis that hedge fund trading causes price volatility in energy futures markets is rejected.

TOPICS: Real assets/alternative investments/private equity, futures and forward contracts, performance measurement

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The Journal of Alternative Investments
Vol. 9, Issue 4
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Hedge Funds, Volatility, and Liquidity Provision in Energy Futures Markets
Michael S. Haigh, Jana Hranaiova, James A. Overdahl
The Journal of Alternative Investments Mar 2007, 9 (4) 10-38; DOI: 10.3905/jai.2007.682734

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Hedge Funds, Volatility, and Liquidity Provision in Energy Futures Markets
Michael S. Haigh, Jana Hranaiova, James A. Overdahl
The Journal of Alternative Investments Mar 2007, 9 (4) 10-38; DOI: 10.3905/jai.2007.682734
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