FM: What led you to develop the Tangible Asset program (TAP) in 1987?
HJ: I sold Mocatta in 1986. Standard Chartered had discussed buying Mocatta eight or 10 years earlier, so it gave me an opportunity to put together a team — knowing that we would get a lot of money for it — [to think] about what you do with a lot of money. How do you manage it so that you make a good return without much risk and put together a risk-disbursing portfolio that consists of short- and long-term bonds, domestic and foreign stocks, commodities, gold and currencies? I gradually developed that concept into which I have put a lot of the assets I gathered over the years. I didn’t want to gamble with the money I worked hard to earn. The commodity section of it had it own life, its own rules, and I had to think very thoroughly about the details of it. What commodities? You can’t just say I am going to put $1 million into commodities. What kinds? Do you want to be represented in all the classes: Industrial metals, precious metals, livestock, agricultural, energies and so on? You have to figure out how much you want of each kind. How often do you want to rethink that? How often do you want to calibrate it? To create a system to do all of that and to think through how to do it, took the eight years I had between the time I learned they wanted to buy Mocatta and the time they actually [paid] for it. There were a lot of people, starting I guess with Goldman Sachs, that started to think about putting commodity futures into a portfolio and offering that to investors. We did that for ourselves. We originally hoped [to utilize the other indexes and save work] but we were dissatisfied with [their] portfolio. The same [thing happened with the AIG Index]. It had its own flaws. We just kept working with our own portfolio and it was very successful; its returns were consistently better than the other commodity futures indexes.
FM: Why did you decide to offer this as a fund?
HJ: There came a time in 2005 when we started talking to a large brokerage house about marketing it separately. We did that and a lot of people had great interest. [Because] our returns stayed higher and our volatilities stayed lower, more and more people flocked to us. We have about $14 billion worth of commodity futures assets that we manage for pension funds [and] sovereign wealth funds, but it came essentially out of my own portfolio.
FM: Prior to the credit crisis Congress was looking to put restrictions on funds such as yours because some felt long-only commodity investments were driving commodity prices higher. Despite the historic credit crisis, Congress and regulators are looking at your space again. Why the urge to demonize speculators?
HJ: The drama occurred in the midst of the credit crisis. It was after the 2008 election that a new regime came into the Commodity Trading Futures Commission (CFTC) and the thought emerged that position limits would be a good idea. At that time they were starting to ease the money supply, there was more and more money sloshing around. Before 2008 everyone took the view ‘let the markets take care of themselves.’
People always have tried to find scapegoats of some kind for rising prices. I don’t think that what firms like ours do for our clients is speculation or has any influence on the prices of the futures markets. What we do doesn’t satisfy any of the criteria of speculation. We don’t select which commodities our clients should buy based on our belief that they are going to go up. We try and give them an exposure to a broadly diversified basket and we undertake a calibration of the portfolio once a year based on global production, trade values and the liquidity of the futures markets associated with them. We just want to give people exposure to commodities because we think that anybody who owns stocks and bonds will have a lower volatility in their overall portfolio when they add commodities to it. What we do isn’t secret, it isn’t undisclosed, we publish it. We don’t employ leverage, we don’t let our clients employ it, we require the clients fund it with a 100% of the notional value of the futures positions. It is odd to call what we do speculative. I have never seen any effort at manipulation or heavy speculation without leverage.