WSJ -- Some Investors Lose Their Zest for Commodities ..............................................
September 21, 2006
Some Investors Lose Their Zest for Commodities
Natural-Gas Debacle at Amaranth May Signal Broad Price Declines; 'Most Were
Just Speculators'
By GREGORY ZUCKERMAN and HENNY SENDER
On the heels of natural-gas losses at Amaranth Advisors and other hedge funds and
a tumble in numerous commodities, some investors are selling such holdings in a
shift that could send prices lower if it turns into a rush for the exits.
After long shying away from oil, natural gas, metals and other raw materials, investors
of all stripes -- hedge funds, pension plans, endowments and individual investors
-- have become enamored with commodity investing. These investors, including short-term
speculators, have become key in various markets, sometimes driving prices more than
industrial customers who buy the materials to make things or sell services.
How these Johnny-come-lately investors react now "will have an effect on users,
commercial producers, as well as investors," says Howard Simons, a strategist
at Chicago-based Bianco Research. "The flood of money that's come in is
out of scale to anything in the past, and most were just speculators."
There are 68 commodity-oriented hedge funds, up from 29 just three years ago, according
to Hedge Fund Research Inc. Those figures don't include the growing number of
managed-futures funds and so-called multistrategy hedge funds, like Amaranth, that
also deal in commodities.
As for pension funds, "until 2003, there wasn't a whole heck of a lot of
interest in commodities," says Neil Rue, principal at Pension Consulting Alliance
Inc. in Los Angeles. "But commodities are becoming a major asset class and
investments in the area have multiplied since 2003. It wasn't 10% or 5% a year,
but much more than that." Mr. Rue cautioned pension-plan clients to be wary
of commodities.
Much as they did with tech-oriented investments shortly before they tanked in 2000,
individual investors also have rushed into commodities, via stocks of commodity-related
companies and mutual funds that specialize in such investments. There are 48 mutual
funds that invest in commodities and related shares managing $56 billion, up from
34 funds with less than $10 billion three years ago, according to fund tracker Morningstar
Inc. The Commodity Real Return fund of Allianz AG's Pacific Investment Management
Co. has grown to more than $12.2 billion, from $8 billion about a year ago.
The 13th-largest holder of gold in the world isn't a central bank but an exchange-traded
fund, a type of security that trades like a stock and tracks the price of an underlying
investment class. StreetracksGold Trust, the largest gold ETF, has assets of $7.5
billion, up from $2.7 billion a year ago, mostly from new investments.
For evidence of these investors' influence, consider the Goldman Sachs commodity
index, one of the most popular vehicles for betting on raw materials. In July, Goldman
Sachs tweaked the index's content by cutting its exposure to gasoline. Investors
tracking the index had to adjust their portfolios accordingly -- which sent gasoline
futures prices tumbling.
Some investors entered these markets because they saw a long-term undersupply of
a range of commodities, including oil, as economic growth in China and India increased
demand. But others were less interested in such fundamentals and shifted in simply
because commodities prices had gone up in recent years, hoping to catch the next
wave. Low interest rates made it possible for hedge funds to borrow at attractive
rates and invest in almost anything.
Lead illustrates the impact: It's basically industrial waste, the unloved byproduct
of processing copper and gold. But prices for lead -- mostly used in batteries,
primarily for vehicles -- have more than doubled in the past five years, even though
stockpiles are high.
Now there are signs that some of that "hot" money is exiting the market.
"Large speculators began to liquidate gold and silver," wrote Mary Ann
Bartels, a Merrill Lynch analyst, in a report this week. "But there are no
signs of panic that accompany a bottom."
The gold ETF has seen little new money in the past month. "The luster is off
this sector, people are suddenly realizing that gold-fund returns will not be as
good as they've been," says Jeff Tjornehoj, an analyst at mutual fund tracker
Lipper.
Merrill Lynch's research suggests that hedge funds that speculate in oil have
been doing some selling lately, but many actually added to their natural-gas positions
while keeping their heating-oil positions unchanged. Oil futures dipped below $60
a barrel during yesterday's trading session and closed at $60.46, down $1.20.
The Pimco commodity fund is seeing little new investments lately, in part because
it's down almost 7% this year, though it also hasn't seen much in the way
of withdrawals, says portfolio manager John Brynjolfsson, calling fund flows "relatively
steady and uneventful."
A fall in commodities prices might not be all bad news. Though a rush for the exits
could cause pain for commodities investors, an additional decline in the cost of
energy and industrial metals could give a shot in the arm to the global economy.
And money moved out of commodities could shift into the stock market, sending shares
higher.
The end of this month could be key. Many commodity-oriented hedge funds let investors
withdraw money monthly or quarterly, so if losses persist, there may be big withdrawals.
That could cause more carnage in the hedge-fund world.
Amaranth's woes were caused by bad bets that natural-gas prices would rebound.
Yesterday, natural-gas futures continued reacting to a large selloff of positions
by Amaranth. October natural-gas futures on the New York Mercantile Exchange dropped
7.5 cents to settle at $4.93 per million British thermal units. November gas futures
settled 18 cents down at $6.02/MMBtu, December futures dropped 22.1 cents to $7.66/MMBtu
and January fell 23.6 cents to $8.20/MMBtu.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com and Henny Sender at henny.sender@wsj.com
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