Hedge funds sell arabica to profit from rally; buy more natgas

NEW YORK, Feb 28 (Reuters) - Hedge funds cut their net long position in arabica coffee this week to profit from the biggest monthly gain in 20 years and raised their bullish exposure to natural gas just before prices for the heating fuel fell, data showed on Friday. The net-long position held by hedge funds and speculators in arabica fell by 16 percent, or 3,859 contracts, to 20,236 contracts at Tuesday's close to finish the week to February 25 at 20,236 contracts, data from the Commodity Futures Trading Commission showed. The most-active second-month contract for New York-traded arabica coffee closed at $1.5485 a lb on February 18 and rose to a near 17-month high of $1.8125 on February 25 before settling the day at $1.7625. Based on that price move, short-term speculators who had held the contract for that week alone would have stood to gain at least 14 percent. Those with continuous long positions stood to gain more. Arabica rallied 40 percent through February as fears of crop damage from Brazil's drought catapulted the market to the top of the commodity gainers table for 2014. Year-to-date, the market is up nearly 60 percent. Weather worries and dwindling inventories have dominated commodities markets this month, drawing investors' attention as raw materials markets decoupled from equities. "The risk-on play in commodities is more alive than ever," said Adam Sarhan, chief executive of New York-based financial advisory and boutique investment firm Sarhan Capital. "There's been a tremendous amount of risk appetite that's returned to the space, a welcome sign after last year's lackluster performance." In natural gas, hedge funds added 5,521 contracts in New York-traded natural gas futures and options, increasing their net long position to 447,529. Natural gas' most-active front-month position hit five-year highs of $6.493 per million British thermal units on February 24, extending a strong run since the start of the year. But a selloff ahead of the contract's expiry forced the market to end the week to February 25 with a 24 percent drop, or the largest weekly loss in 17 years.

(Editing by Jonathan Oatis)