Jarecki was already an accomplished psychiatrist, businessman and futures industry pioneer when, after selling his interest in Mocatta Metals, the U.S. affiliate of Mocatta & Goldsmid Ltd., the famous 300-year-old bullion trading company, he was looking to invest his family fortune. He already knew the value of an investment in commodities, being enmeshed in both the physical market with Mocatta and the futures side with his futures commission merchant Brody White & Company, which he would later sell to Fimat.
Fear of losing his windfall from Mocatta led him to study asset allocation and eventually to implement a diversified strategy based on his findings, which included a portfolio mix of stocks, bonds, currencies, real estate and commodities.
In 1987, he developed his tangible asset program (TAP), which would become the basis for a fund offered through his company Gresham Asset Management LLC. He started out with an allocation to commodities of about 15%. “That gave us a much more stable return on the portfolio than any other mix would have done,” he says. Jarecki thought life would be simpler when commodity indexes developed but he found that they did not improve on his methodology and did not provide the same diversification. “When Goldman Sachs started its index, I quickly discovered that their methodology could lead to a heavy concentration in any asset that had gone up because they never rebalanced it during the year. They were so skewed to whatever the flavor of the day was that when one invests in a Goldman Sachs fund, one is 75% or more in energy. We ultimately developed our own fund that other people asked to participate in.”
TAP has exposure to a broad range of commodities. “As a result, we don’t let any single commodity group take on more than 35%. Otherwise you get into a situation like the Goldman Sachs index where 75% is energy. That’s like investing in an energy dog with a sugar/cocoa tail.”
When designing his commodity portfolio it wasn’t to create a trading vehicle, but his methodology has an advantage to funds benchmarked to indexes because it has greater flexibility. “We’re scale-up sellers and scale-down buyers with our investments,” Jarecki says.
Indexes have published rules, which allow traders to try and get in front of rolls that can create slippage due to “roll congestion.” “I’ve often looked at specific dates that others use and there seems to be price impacts. I’ve tried to avoid those in my own trading.”
Jarecki recognizes the role commodities have played as an inflation offset and does not believe the currently popular theory that the funds themselves are responsible for rising commodity prices. “The growth in the funds is a result of inflation. There’s more money chasing fewer goods, and that leads to inflation. Inflation has caused the credit crunch and that’s going to be solved probably by more inflation,” Jarecki says. And commodities have always been a great inflation hedge.
While those blaming speculators for rising commodity prices look at futures, Jarecki has always tended to look at the entire market. “Money involved in the futures market is so tiny compared to the overall market. Physical commodities amounts are much larger than what’s traded in futures.”
Jarecki’s understanding of the interplay between futures and physicals goes all the way to his firm’s role in stabilizing the silver market after the Hunt brothers attempted to corner that market. “When the Hunt position became troubled, I put together a syndicate to offer to buy them out,” Jarecki says. When the Hunts went bankrupt, he was ready to step in. “I had this very large consortium that was ready to buy silver at a discount. Then when the big trading houses started to liquidate their positions, we bought tens of millions of ounces of silver over the next week or so and stabilized the price. It was not a bad year or two’s profit, but it happened all in a week.”
Jarecki is worried that Congress wants to use regulation as a tool to affect price. “The goal of spec limits has always been to prevent squeezes and corners and make sure the speculators aren’t able to do what the Hunts sought to do. Some say, ‘let’s increase the margins. Let’s use margins not for the original purpose of risk reduction, let’s use it for some other purpose.’ That’s a grave error,” Jarecki says.
“The markets have been working. There’s a notion, without good reason, that there’s a benefit to changing things around. But that could have unintended consequences, the most important of which is that the oil producers will use the foreign markets and the foreign oil producers will be able to do whatever they want without American regulatory agencies being able to see the volume and the prices. It doesn’t sound like a good idea to me.”