Investor Interest in Commodities on the Rise
To spot worldwide investor trends, BHA analysts periodically step back from the day-to-day news and investor conversations and look at the big picture. They did this recently, evaluating BHA hedge fund investor mandates from April 1 through mid-July and comparing them with mandates from the same period a year ago. There was a noteworthy difference. In the 2010 time frame, 120 investor mandates specified the commodities sector as a major interest. Last year during this period, only 70 mandates included commodities. This represents a significant increase of 71 percent from 2009 to 2010.
Over the past month, BHA has interviewed a wide variety of investors around the globe. Whether they were family offices, corporate pensions, consultants, fund of funds, or wealth advisors, many of them expressed an interest in increasing their exposure to commodities. Despite the volatility and uncertainty in the marketplace this year, these alternative investors saw commodities as an opportunity to offset equity risk with potential growth and stability.
A family office in New York, for example, stated that it is specifically seeking funds focused on commodities. The firm mentioned that it is researching a variety of strategies including asset-based lending, credit, CTA/managed futures, distressed, and emerging markets.
A fund of funds investor based in Austria has also shifted its interest to the commodities area. Previously the firm was primarily focused on global macro hedge fund managers, but recently it told BHA analysts that it is seeking CTA managers for new investment opportunities in 2010.
There may be another explanation for rising commodity interest. Investing in commodities can be an effective hedge against rising interest rates. The Federal Reserve pushed up the discount rate to .75 percent in mid-February for the first time in over three and a half years, and this is likely to occur again.
“Portfolios that add commodities after the Federal Reserve tightens the discount rate, perform better than portfolios that don’t,” stated Wall Street Journal writer, Carolyn Cui.1 She came to her conclusion after analyzing data on a new study that will be published in the Journal of Investing. The authors of this study researched data from December 1970 through August 2007.
To explain the process, Cui stated, “The researchers added a basket of commodity futures tracking the S&P GSCI Commodity Index to five types of stock portfolios: value, small-cap, momentum, growth and large-cap. The commodities added to the returns of all five equity styles during periods when the Fed tightens the discount rate.”
Whether to offset equity risk or hedge rising interest rates, investors around the world are beginning to see positive investment opportunities with commodities-related funds. Confidence has truly grown and only time will tell if commodity interest will continue to rise in the future.
1 Dailymarkets.com “Investing In Commodities: A Hedge Against Rising Interest Rates” April 26, 2010, http://www.dailymarkets.com/forex/2010/04/26/investing-in-commodities-a-hedge-against-rising-interest-rates/.