Vermillion Fund Said to Start in Shanghai Free Trade Zone

May 16, 2014 4:31 am ET

(Adds commodity prices in seventh paragraph.)

May 16 (Bloomberg) -- Vermillion Asset Management LLC, a New York-based hedge fund firm, incorporated a trading unit in the Shanghai free-trade zone where the world’s second-largest economy is seeking to boost trade and financial services.

The unit of Vermillion, 55 percent owned by Carlyle Group LP, is for commodities trading and is led by Ian McGuinn, said three people with direct knowledge of the matter who asked not to be identified because the issue is private. Andrew Gilbert, co-founder of Vermillion, declined to comment when contacted via e-mail. Nobody answered at least four calls to the offices of the free-trade zone administration yesterday and today.

The hedge fund is among the latest of more than 100 commodities traders to set up in Shanghai, joining the likes of Trafigura Beheer BV and Louis Dreyfus Commodities BV. Foreign companies are seeking to take advantage of regulation in the free-trade zone that’s more relaxed than in the rest of mainland China, and tap into growing demand for raw materials in the world’s biggest user of energy and metal.

“Just the promise of fewer regulations on commodity trade, easier forex exchange conversion, less regulation on the banking sector, it holds out promises to especially financial players,” said Sijin Cheng, a Singapore-based analyst at Barclays Plc. “But to what extent the Chinese government can go beyond the national policy, it’s still something they are working out.”

Exchanges Access

International companies are blocked from trading on the three mainland commodity exchanges where futures volume growth was ranked among top five worldwide in 2013 by the London-based World Federation of Exchanges. Chinese companies are also restricted in their access to bourses including the London Metal Exchange, which sets price benchmarks for global metals.

Vermillion, founded in 2005 by Gilbert and Chris Nygaard, trades in derivative and physical markets of agricultural commodities, energy, metals and freight, according to Carlyle Group’s website. The firm advises four funds with assets under management totaling about $900 million at end-2013, according to a Carlyle annual report.

Commodities measured by the Standard & Poor’s GSCI Spot Index of 24 futures added 3.1 percent this year, reversing last year’s 2.2 percent drop. Coffee, hogs and nickel led gains.

The 29-square kilometer (11-square mile) area in Shanghai that opened in September has fewer curbs over interest rates, yuan conversion and other market instruments. Baosteel Group Corp. and the Shanghai Gold Exchange are among those looking to start commodity exchanges in the zone where foreign investors can also trade energy futures.

“No doubt about Shanghai becoming a global trading hub for commodities,” said Chief Executive Officer Thomas McMahon of Singapore-based UD Trading Group Holding Pte, who has been involved in commodities since 1977. “You have the professionalism of players ex-China, and the inherent demand there - it’s the best of both worlds.”

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--With assistance from Winnie Zhu in Singapore, Alex Davis in Hong Kong, Devin Banerjee in New York and Alfred Cang in Shanghai.