Roll losses swallow up commodity inflows

July 30, 2010

Total assets under management in commodity-tracking indices and exchange-traded products (ETPs) have stalled over the last nine months, as roll losses swallow up fresh money inflows.

There has been little change in total money committed to index-like investments or its distribution between long and short positions, according to the latest quarterly figures released by the U.S. Commodity Futures Trading Commission (CFTC) yesterday, which show positions as of 30 June 2010.

The data is based on a special call sent to all known index operators and firms offering futures and options-based exchange-traded products. It is the most comprehensive measure of total funds under management in the passive sector, but excludes physically backed ETPs such as the popular SPDR Gold Trust .

Investors had a total of almost $264 billion in commodity indices and ETPs at the end of Q2 2010, down from the $271 billion at the end of Q1, but little changed from the $263 billion reported at the end of 2009.

Investments were split in a ratio of 4.11:1 with $212 billion worth of long futures and options positions and $52 billion worth of shorts. The ratio was slightly more bullish than at end-March (3.95:1) but essentially identical to the ratio reported at the end of 2009 (4.12:1).

In energy, the long/short ratio climbed from 3.88 to 4.37, the most bullish since 2008. But the jump was due to profit-taking by shorts after a profitable period characterised by declining spot prices and a pronounced contango structure in futures markets. On a net basis, there were no new long positions. Investors’ long exposure fell reflecting roll losses.
Commodity futures markets have reached equilibrium. Fresh money is still flowing in (evidenced by the fact assets under management have remained steady despite roll losses associated with the contango structure). But inflows have been offset by the contango structure, ensuring little upward pressure on prices.

Much greater switching in the proportion of funds allocated to individual commodities indicates that the investment focus is switching away from indices with fixed weightings towards dynamically re-weighted products or single-commodity indices and ETPs that enable a more active and tactical approach to take advantage of particular trends or futures market structures.

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