Newbie Investors Fueling Commodities Boom

May 23 2008 | 2:00am ET

New research from Greenwich Associates reveals that more than a third of investors in commodities have been active in these markets for less than three years, and more than one in 10 say they started investing in over-the-counter commodity derivatives within the past 12 months.

According to the research, the growing ranks of commodity market investors consist of three types of insitutions: pension funds, which use commodities as a portfolio diversification tool; European banks, which use commodity derivatives to structure retail products that they then sell to their retail customers; and hedge funds, which use commodities as a source of alpha.

Overall, about 55% of the investors say they use commodity derivatives for diversification, including almost 85% of pension funds and fund managers, according to Greenwich consultant Frank Feenstra. At the same time, almost 40% of the investors say they use these instruments to generate alpha, including nearly three-quarters of hedge funds.

Nearly 45% of investors say they invest in index swaps and 39% say they use plain vanilla non-index commodity swaps. About a quarter use OTC commodity options and 21% use structured notes with commodities underlying.

“In general, fund managers and pension funds are more likely to invest in index options, while banks are more likely to use single-commodity swaps and structured notes,” noted Greenwich consultant Woody Canaday.

Between 20% and 30% of investors are active in OTC derivatives in oil and natural gas. Fifteen percent to 20% of investors use OTC derivatives in base metals and precious metals, and just under 10% of investors use OTC derivatives in electricity.


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