Before we shoot ”the funds” for first causing a price bubble and then leaving ag markets, bursting that bubble and causing prices to plummet, consider a recent study by University of Illinois economists Dwight Sanders, Scott Irwin and Robert Merrin.
- If index fund activity affects prices, it would have shown up during 2004-05, when funds' growth as a percentage of open interest was most rapid.
- Funds have stabilized as a percent of open interest, "which mean other traders have adjusted their strategies in light of this relatively new market participant.”
- Long-only index funds may help "carry” unbalanced short hedging.
"Proposals surfacing to increase margins in an effort to curb speculation may well be counterproductive in terms of price levels or market volatility. These policy initiatives could severely compromise the ability of futures market s to accommodate hedgers and facilitate the transfer of risk.