Investors rush to commodity funds

The world's largest commodity hedge fund, Clive Capital, closed its doors to new investors this week, providing a clear illustration of this year's remarkable turnround in investor appetite for commodities.

At the beginning of the year, many commodity hedge funds were being forced to sell holdings to meet investor redemptions.

Clive Capital's move follows a similar decision by prominent commodity fund manager Galena Asset Management, which last month stopped accepting new money into its metals fund.

This strong investor appetite for commodity hedge funds mirrors demand for commodity exchange-traded products and index funds as growing confidence in global economic recovery and China's voracious hunger for raw materials continues to draw large inflows.

Broader based hedge funds have also dramatically expanded their commodity positions.

Suki Cooper, analyst at Barclays Capital, estimates that commodity assets under management reached $224bn at the end of the third quarter, up 36.6 per cent from $164bn at the end of last year.

Although rising commodity prices have boosted total assets under management, about $51.4bn of new money entered commodity markets between January and September, says Barclays.

Robust inflows continued in October pushing total commodity assets under management towards the all-time high of $270bn, reached in the second quarter of 2008, just as crude oil was approaching its all-time high of $147 a barrel.

Ms Cooper says that the lion's share of inflows in the first quarter of the year were captured by exchange-traded products, particularly physically backed precious metal funds.

Holdings in the gold, silver, platinum and palladium exchange traded funds all stand either at or near to record levels, with inflows continuing into the second half of 2009, albeit at a slower pace than in the first half of the year.

At a Credit Suisse conference in September, 51 per cent of managers surveyed said they would increase their level of commodity investment to overweight over the next year, compared with 30 per cent now.

Barclays says ETF inflows have been bolstered by a renewed interest in broad-based commodity indices, which can enhance portfolio diversification and reduce volatility.

"The evidence is that investors continue to value commodity exposure for portfolio diversification and as an inflation hedge," says Barclays: "We expect this trend to continue, with commodities continuing to capture a growing share of the global investment portfolio."

Kamal Naqvi, a director in commodities at Credit Suisse, says commodities are now widely recognised as a key influence over returns from other asset classes. "The outlook for crude oil prices is now an accepted driver of future economic growth and inflation expectations," he says.

But the prospect of further investor interest is viewed as a potentially mixed blessing by some traders, who remain concerned that financial inflows could divorce some commodities from supply and demand fundamentals.

Looking at copper, where prices have more than doubled this year, one senior trader says: "Stocks are rising, consumer demand outside China remains flat and we should expect prices to pull back before year-end.
"Yet prices will remain dislocated as long as money looks for a haven."