Thursday, May 15, 2008


Barclay Roundtable: Soaring Commodity Prices Coupled with Fed Easing Fuels Inflation

Supply/Demand Imbalances May Only be Part of the Problem; Is the Weak Dollar Also to Blame?

From the Quarter 2, 2008 issue of Barclay Managed Funds Report published by BarclayHedge. The full report also includes 24 hedge fund and managed futures performance ranking tables and in-depth manager profiles. Subscribe. View Roundtables from back issues.

Sebastian Barrack, MacquarieInvestment Management, Ltd.
Brad Cole, Cole Partners Asset Management LLC.
Jodie Gunzberg, CFA, The Marco Consulting Group
Hilary Till, Premia Capital Management, LLC

Our panel of experts answers these questions:
Most commodity indices are heavily weighted in energy, primarily oil. No doubt oil has been the headline over the past 12 months as prices have reached historic levels. There have, however, been significant gains by less “flashy” index components (e.g., wheat) over the past several months. In your estimation, have the most successful trading programs been oil-centric, or is there significant potential value added by straying from the typical index weights? In which commodities would you recommend an overweight position over the next 12 months? Which would you underweight or short for the same period?

Gold has also been a major headlining commodity recently despite representing only a minor portion of most commodity indices. The press tends to emphasize gold as a counter to the weakening dollar. To what extent has the weak dollar been a factor in the ascension of gold prices? Are there any other significant fundamental reasons for gold’s lofty valuations? How much have technicals supported the price?

Commodity trading strategies can rudimentarily be divided into discretionary and systematic programs. How does the current and prospective fundamental landscape favor discretionary strategies? In your opinion, which commodities continue to have favorable fundamentals? Which do you see as overvalued? What technical features of the current commodities landscape favor systematic trading programs?

Futures and options have historically been the most prevalent instruments employed to trade commodities. Over the past couple of years, however, there have been a number of commodity-linked structured products and exchange traded funds that allow participation in these markets. To what degree have these new structures been added to the mix of instruments used by professional asset managers? Are there any inherent inefficiencies within these structures that make them attractive? Unattractive?

Another angle for gaining natural resources exposure is by investing in public companies that derive a majority of their revenues from the commodities markets (e.g., oil services, mining, and storage companies). What are the advantages and disadvantage to this type of exposure? Are general equity market correlations a concern, or do these types of stocks offer significant diversification? Are there any attractive public debt, private equity, and/or private debt situations offered by these types of companies?

Historically, within the context of any perceived asset “bubble”, there always tends to be an influx of managers who ride the wave, garnering outsized returns with primarily unhedged strategies. Not surprisingly, most of these managers get carried out on a stretcher when the bubble finally bursts. In your opinion, do you believe commodities are in danger of entering bubble proportions at this time? In you estimation, are there a lot of players riding this wave without much attention to hedging and risk management? How susceptible might the entire commodity sub sector be to a downturn and mass liquidations?

Read the complete article and the panel members' answers.

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