A little over a decade ago there was an explosion in investments in commodities. The Goldman Sachs Commodity Index (now the S&P GSCI Index) grew from a couple of million to several hundred million. It was and is the largest long-only commodity index but there are others, including the Dow Jones UBS Commodity Index and the Rogers International Commodity Index. Many retail investors were drawn to it in the years following the end of the historic 1982-2000 bull market. Goldman promoted the index as a hedge against inflation, something to which everyone should have about a 4% allocation. As inflation fears grew so did the allocation to long-only commodities that appeared safer in index form, than the wild world of commodity trading. And it worked as commodities went on an impressive bull run despite the headwinds of contango in energy markets.
As commodities rallied, the long-only index became a target for analysts and politicians who blamed it for higher food and energy costs. People were sold on it as a hedge against inflation but its critics argued it was the cause of inflation.
When all markets tanked in the second half of 2008 some of the bloom came off the long-only commodity rose. Critics argued long-only commodity investing didn’t work or was evil for increasing the price of food and energy.
Another problem developed in the aftermath of the 2008 credit crisis. Commodity markets had become highly correlated to equities. The S&P 500 (CME:SPU14) Total Return Index had a correlation with the GSCI of 0.18 from 1980 to present but that correlation grew to 0.66 from 2009 through 2013. It is hard to promote a product as being non-correlated with those numbers.
The good thing about the growth of long-only indexes according to Rollinger and Lee Partridge, chief investment officer at Salient Partners, is that it may have gotten investors comfortable with the asset class.
“Now you are starting to pull together two things that people want,” Partridge says, “They want ag allocations, they want commodity allocations and they want it to be managed actively in a long/short portfolio. We are definitely seeing investor demand for that and we have demand for that.”
Rollinger also is making the case for long/short and has backed it up with his program as well as research.
While both are promoting their book of business, they have made a solid argument for active commodity investing. In a sense commodity investing has taken the opposite route of equities. While studies have shown that active management in equities is more expensive and less productive than passive management, in recent years, money flows have gone the opposite way in commodities.
The average growth in money under management in 2013 for fundamental agricultural programs in the Barclay CTA index in 2013 was $10.3 million. This is a significant figure given that most of these programs are capacity restrained. Many of these programs reach capacity before the $100 million mark so an increase of more than $10 million is significant, especially in a difficult environment for the space in general.
Obviously different strategies perform better and worse at different times, and modern portfolio theory argues for an all-of-the-above approach to investing. Perhaps now is a time for investors to find one missing piece of the puzzle that offers diversification from not only traditional investments but also diversification within the managed futures space.