Ultra low interest rates are bringing a wave of speculation to commodities, inflating a bubble that will inevitably burst some markets, the head of a London-based fund management company said on Thursday.

Jonathan Compton, managing director of long-only equity investment group Bedlam Asset Management, which has around $620 million assets under management, said oil, copper and some other commodities were vulnerable to sharp corrections.

Disappointed by losses in stock markets and bonds during the recession, investors had turned to commodities in the hope of better returns, many borrowing at very low interest rates.

'You will see a fantastic unwinding of the speculative longs the moment rates move up,' Compton told Reuters in an interview.

'Commodities most vulnerable will be the ones that are most widely held: copper and oil ... and some very funny financials.'    

Pension funds and money managers have tripled their holdings in commodities markets since 2007, industry data show, with $250 billion to $300 billion now invested by passive long-only funds.

Hedge funds and other actively managed units also hold huge stakes in commodities and together buy-side investors control as much as half of the open interest in some commodity markets.   

This has made some commodities, inflated by speculative, short-term capital, vulnerable, some analysts say. Compton is particularly scathing of some exchange-traded products, some of which he said were 'structurally odd' or administered in several countries, preventing proper oversight.

ETPs and exchange-traded funds (ETFs) are listed vehicles allowing buyers to hold securities that move up and down with a commodity or other investment. Most gold ETFs are backed by bullion and seen as almost risk free. But other ETPs are more exotic, based on futures or derivatives or are highly geared.

'The industry is probably 95 percent clean, if not more. But you only need a couple to go off and you have a domino effect. Then you get real panic and commodities get dumped,' he said.

Compton said copper and oil could both be vulnerable to downward corrections, and the fall in copper could be serious.

'Copper stands out because it is the absolute bellwether proxy industrial metal. My concern is the very long positions in ETFs ... there is rampant speculation.'    

'World copper stockpiles are rising and more and more ETFs are being sold,' he said. 'If a commodity price is rising along with reserves, there is clearly a mismatch. ETFs are temporarily taking supply off the market -- but it is very temporary.'   - Reuters