FFAs: Beyond hedging

Drawing on reflections from shipowners, brokers and fund managers, the discussion highlighted an industry still grappling with structural conservatism even as liquidity, accessibility and strategic applications of derivatives expand.      Opening the session, Nadia Mirza, head of business development at the Baltic Exchange, framed the central issue facing freight derivatives today. “Freight, as you know, is arguably one of the most volatile markets out there, and yet a significant proportion of the market… goes unmanaged,” she said, noting that many participants have yet to embrace available tools despite dramatic earnings swings.    That reluctance is particularly evident among traditional shipowners. Kyriakos Attikouris, chief risk officer at CQuake Shipping Fund, traced the issue to the cultural foundations of the shipping industry. “You meet with an owner and they will introduce themselves by saying we’re conservative, traditional, serious people,” he said, arguing that this self-image can discourage the adoption of more sophisticated financial tools.   Attikouris suggested the absence of external pressure has slowed change. In contrast to the shift toward corporate structures driven by banking regulations in previous decades, the derivatives market lacks a comparable catalyst. “In the case of FFA, there is no such external force to bring change, and ship owners need to find the necessary motivation from within,” he explained, adding that many still struggle to identify a compelling “value proposition”.   Even where awareness is improving, resistance remains rooted in the industry’s transformation from a technical to a financialised ecosystem.

Pheobus Kaloudis of SSY Futures observed that shipping has historically been “run by engineers and maritime engineers and captains”, making the shift toward derivatives trading “a very difficult transformation”.   However, signs of progress are evident. Demetris Polemis, co-founder of Paralos Fund, pointed to a decade-long improvement in market knowledge and transparency, highlighting the impact of screen-based trading and the emergence of exchange-traded products. This evolution has also dispelled earlier misconceptions. “There used to be comments, saying the market is manipulated [by certain players]. Those kinds of things have kind of gone by the wayside,” Polemis noted, arguing that broader participation has strengthened credibility and understanding. A critical development has been the opening of the market to smaller owners. Kaloudis said that not long ago, derivatives were effectively inaccessible to operators with limited fleets. “If someone said… ‘go and speak to this owner, they’ve got three ships’, there’s no way that they could use FFA. Now that’s all gone out the window,” he said, attributing this shift to Baltic indices and more flexible commercial structures.   The growing involvement of financial players has further reshaped the landscape. According to Emily Driver, head of dry FFA at Clarksons, the influx of hedge funds and systematic traders has, in some cases, unsettled traditional players. Yet she argued that their presence ultimately enhances market efficiency. “Liquidity is better. It used to be that people were nervous, came into the market, and then couldn’t get out of a position. That’s not the case anymore,” she said, suggesting that physical market participants can use this increased activity to their advantage.   Rather than seeing financial entrants as a threat, Driver emphasised the informational edge still held by shipowners. “Nobody knows the shipping market like people who have dry bulk exposure,” she said, positioning derivatives as a complementary tool rather than a competitor to physical trading expertise.      The tanker segment has also seen notable momentum. Polemis highlighted a surge in participation and liquidity, noting that the market has seen volumes “explode” in aframaxes, with oil traders and hedge funds increasingly active in freight markets.

Despite these advances, misconceptions persist—particularly regarding the function of the forward curve. Vassilis Karakoulakis of Propel Shipping described this as “the biggest mythical conception”. He stressed that the curve is not predictive. “It’s anything but a forecast… it’s what a collective number of people feel that the market should be,” he said, warning against overly simplistic interpretations.

For Karakoulakis, the current market environment underscores the opportunity presented by derivatives. With strong earnings and elevated forward prices, owners have a chance to secure value incrementally rather than committing entire vessels to period charters. “The beauty of it… is that you can hedge without exposing your whole ship,” he said, pointing to the flexibility of trading smaller “clips” of exposure. That flexibility is increasingly seen as a defining advantage of FFAs over traditional chartering. Unlike fixed-rate employment, derivatives allow participants to adjust positions dynamically. “You can easily come out of it; you can’t from a ship,” Karakoulakis added, highlighting the contrast with physical contracts.   Options are also emerging as an entry point for new participants. Polemis suggested that limited downside exposure makes them attractive for less experienced traders.  “If you’re buying options, your downside is limited to the premium you pay,” he said, though he cautioned about liquidity gaps compared to futures.   Kaloudis described options as enabling “a tremendous multitude of different applications” tailored to diverse risk appetites. The growing “biodiversity” of strategies reflects increasing sophistication among participants, including entrants from other industries.      Another powerful argument for derivatives lies not in hedging but in operational flexibility. Attikouris urged market promoters to rethink how FFAs are presented to owners. “Stop overselling the hedging aspect of FFAs, especially if you’re talking to ship owners. The real value and what we should be selling is the flexibility, the granularity, and the ability to tweak the risk profile upon demand.        “There are so many other reasons to trade FFAs from an owner’s perspective. Hedging is not a strong argument.”   Yet, structural barriers remain. Polemis pointed to practical challenges such as account setup and broker access, arguing that the industry must “lower the barriers of entry” if it wants to expand participation. Driver noted that compliance requirements can be demanding, particularly for regulated firms, but said that “brokers want more counterparties in the market” and are actively supporting new entrants.         Nevertheless, the pace of adoption will depend on changing entrenched mindsets. As Karakoulakis put it, dismissing FFAs as distortive is “unintelligent”, arguing instead that they create opportunities grounded in the realities of physical supply and demand.