Hedge Funds moving into Physical Energy Commodities
A hedge fund is an investment firm that tries to make profits using many different trading strategies. More and more hedge funds and trading firms are moving beyond “paper trading”. Paper trading is where they are buying and selling financial contracts linked to oil, gas, or power. It is about trading financial contracts (futures, options, swaps) where the trader never actually touches the physical asset. Traditionally, hedge funds are financial entities, not logistical ones. They almost exclusively trade "paper" while leaving "physical" trading to commodity trading houses (like Glencore, Vitol, or Trafigura) and industrial producers (like Exxon or Cargill). So, paper trading is when hedge funds are buying a contract on an energy commodity like oil, and buy it to bet that its price will go up. Before the contract expires, they sell the contract to someone else. The only thing that changes hands is cash. Hedge funds now are also moving into Physical Trading i.e. they are buying a number of actual barrels of oil, putting them on a ship, storing them in a tank, and delivering them to a refinery. Hedge funds historically avoided physical trading. Physical trading requires ships, warehouses, pipelines, and insurance. It involves dealing with weather delays, customs, and quality degradation (e.g., grain rotting). Hedge funds are built to move capital, not cargo. Also, hedge funds thrive on leverage. It is much easier to get 10x leverage on a financial futures contract than it is to get a bank to lend you money to buy physical coal. However, in recent years, hedge funds (like Citadel, Millennium, Balyasny, and Point72) have built out physical trading desks, particularly in energy (natural gas and electricity). The full report is inside Classroom ---> 6.2. Sources: [1]: Financial Times: https://www.ft.com/content/598c3bfc-008c-438f-837c-f7ec73a993f6 [2]: The Economist: https://www.economist.com/finance-and-economics/2025/06/26/why-commodities-are-on-a-rollercoaster-ride