Non-Commercial vs Managed Money Hedge Fund Traders

What's the difference between a non-commercial trader and a managed money trader?

At Peak Trading Research we get this question all the time.

If you're a professional agriculture trader, you know that hedge funds are the predominant price drivers in agriculture futures markets but maybe you're unclear on the differences between these two hedge fund categories.

Today, we're going to go through the differences between non-commercial and managed money traders and we’ll tell you which category we prefer for analysis and systematic trading.

Hedge funds are the dominant participants in agriculture markets.

We've talked about this in a previous article here. When hedge funds buy prices go up, when hedge funds sell prices go down. Understanding hedge fund positioning is important.

But the CFTC makes this a little confusing because they put out two different COT reports: a managed money position and a non-commercial position.

So what's the difference between a non-commercial trader and a managed money trader? And which one should you be looking at for your analysis and trading?

Before we jump into that, let's back up and look at all the categories within these two different reports.  

Comparison of the 2 CFTC reports (Supplemental and Disaggregated)

If we look at the differences between the supplemental report and disaggregated report, one of the first things that jumps out to us is that the disaggregated report has an extra category.

All large speculators fall into the non-commercial report in the supplemental report, but large speculators are split up into two categories in the disaggregated report: managed money traders and other reportables.

This is the first reason that we prefer the non-commercial position to the managed money position. When you look at the non-commercial position, you have the confidence that you're looking at the position for all large speculators. When you look at managed money traders, you might be missing some important traders like family offices or Chinese speculators (other reportable traders). The non-commercial position quantifies the position for all large speculators.

The second reason that we prefer the non-commercial position to the managed money position is also just a function of our background and experience at Peak Trading Research.  Dave Whitcomb, Head of Research, was an agriculture trader at Cargill for 12 years. Cargill is one of the world's largest commercial trading houses. It’s our experience that most commercial traders tend to reference the non-commercial position. Most hedge fund traders tend to reference the managed money position.

For example, if you were sitting in on a meeting at Cargill or ADM or Bunge, and you heard their head Corn trader say hedge funds are 200,000 contracts long Corn, it's very likely that that trader is referencing the non-commercial position *not* the managed money position.

So again, that second reason that we like the non-commercial position is that it's more often referenced by the world's largest commercial traders.

And finally, the third reason that we prefer the non-commercial position to the managed money position is that we prefer the supplemental report overall in the way that the categories are defined versus the disaggregated report. As we discussed earlier, the disaggregated report has two different categories for large speculators:  managed money traders and other reportable traders.

And then there's the swap dealer category, which is just a mess. The swap category has non-commercial swaps, commercial swaps, and index swaps. It isn't as clean as the index category in the supplemental report. So, because we like the categories in the supplemental report more than the categories and the disaggregated report, it follows that we prefer the non-commercial position.

To review the three reasons why we prefer non-commercial versus managed money positions:

• #1: The non-commercial position quantifies the positioning for *all* large speculators. The managed money category does not do that…it misses important ‘other reportable’ category traders.

• #2: Large commercial trading houses like Cargill and ADM and Bunge usually reference the non-commercial position, not the managed money position.

• #3: Categories are better defined in the supplemental report, which includes non-commercial traders.

Now, the one big advantage of the managed money position in the disaggregated report is that it covers more markets. If you're a trader in the Spring Wheat market or Oats or Canola or White Sugar or Robusta Coffee, you unfortunately only have a managed money position. You don't have a non-commercial position reported by the CFTC for your market.

Now, as we wrap up, there's one thing we want to emphasize, and that is if you're using the non-commercial position or the managed money position to build systematic trading strategies, you are doing the right thing.

You should not, for example, be trying to build trading systems around the index position or the commercial position or the garbage swap category. The non-commercial position and the managed money position are always the categories that will give you the best signals for your trading.

And as much as we've highlighted the differences between these two categories, they actually move in a very similar way. For example, if we look at the last 10 years, the correlation between the non-commercial position and managed money position in Corn is 0.90, in Wheat it's 0.92, in Soybeans it's 0.98! As much as we've highlighted a lot of differences between the non-commercial and managed money categories, they really do move together.

At Peak Trading Research we use machine learning to provide our clients with daily live estimates for non-commercial and managed money positions across all agriculture, energy, and metals markets.

If you'd like a trial of our research, you can reach out any time, insight@peaktradingresearch.com.