Volatility drives investors to freight futures market

Will increased investor play wreak havoc on freight rates?

By Dave Hannon -- Purchasing, 3/13/2008 1:57:00 PM

The continuing ups and downs of the ocean freight rate market will drive even more volatility, as investors look to capitalize on the freight futures market.

A chart of activity on the Baltic Exchange’s Dry Index over the past year shows the pattern of volatility that has investment banks and hedge funds flocking to the freight derivatives market, which more than doubled its trading activity in 2007.

"The exceptional growth has been driven by financial players who want exposure to the shipping markets, exposure to China and India, and cashing in on that growth," said spokesman for London's Baltic Exchange, Bill Lines in a recent Reuters interview.

Michael Gaylard, strategic director at the Freight Investor Services, one of the market’s leading brokers, recently told the U.K.’s Financial Times that banks and hedge funds have helped drive this market as they now make up a large slice of the volumes.

The Financial Times report goes on to say that the derivatives market should maintain expanding at a fast rate, with some experts forecasting that it will grow larger than the underlying physical market in freight, which is worth $150 billion, by the end of the year.

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