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Hedge Fund Bullishness on Metal Stocks Hits 3-Year High

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Sometimes, hedge funds turn to commodities when they seek investment opportunities. Commodities are good investments during periods of economic growth. One group of commodities that hedge funds have been paying more attention lately are metals, whose prices have been growing amid signals of strong demand and the stock market environment requires new opportunities to invest. Among metals, copper has enjoyed higher prices as demand from China and a weaker US dollar, helped boost the prices to around $7,000 per tonne, which are the highest levels in three-years.

One reason for hedge funds flocking towards metals is the winding down of the oversupply, which had been plaguing on the market until recently. China, which is the leading producer of industrial metals has started to reduce its supplies for climate change-related reason. Metals had been overlooked by many hedge funds for years as the oversupply led to lower prices, which in turn caused some metal-focused hedge funds to shut down. For example, in 2014, Hall Commodities, a London-based $100 million hedge fund closed after less than two years in business, citing poor performance.

However, as interest rates in the US remain low, the stock market enjoys historically high levels, hedge funds turn their attention to metals as they are trying to hedge against a potential market crash and bet that demand will remain strong.  According to S&P Global Market Intelligence data, hedge funds’ investments in metal and mining stocks jumped to $18.52 billion in September, from $10.16 billion in 2015. However, the figures are still lower compared to a peak of investments of $28.98 billion registered in 2010. Barclays estimates that investment in industrial metals, which includes investments in indices and metal-focused ETFs amounted to $27 billion in July, up from $23 billion last year and $14 billion in 2015.

bogdanhoda/Shutterstock.com

bogdanhoda/Shutterstock.com

In addition, the US slapped a tariff of 522% on Chinese-made cold-rolled flat steel last year. This suggests that US steel makers should expect more demand, which is why steel companies’ stocks also registered an increase in popularity among hedge funds. The new Washington administration had suggested increased spending on infrastructure, which should provide more demand for raw materials, particularly steel, which is one of the most used metals in construction.

We see similar trends among hedge funds that we track at Insider Monkey. We follow over 650 hedge funds and analyze their quarterly 13F filings to identify their collective sentiment towards different stocks. While this data usually fluctuates, over the longer-term some trends can be identified. Take for example Steel Dynamics, Inc. (NASDAQ:STLD), which manufactures steel, in which there were 36 funds from our database holding shares at the end of June, up from 31 funds a quarter earlier, which is lower than 42 funds that held shares at the end of June. However, at the end of 2015, there were just 28 funds holding shares of Steel Dynamic, Inc. (NASDAQ:STLD). And similar increases in popularity were registered by other metal stocks as well.

We have selected five metal stocks that registered increases in the number of bullish investors during the second quarter of 2017. Let’s take a look at how the bullish sentiment towards them changed over the last couple of years and at the performance of the stocks in question.

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