In 2007-2008 Goldman and the other banks went forth and proclaimed commodities an asset class, basing the pitch on the move over the prior five-six years of most commods (if I recall correctly, gold bottomed at $252 in the Spring of 2001).
The so-called investment professionals at the behemoth funds (CalPERS topped out at $260.6 billion before getting their butts kicked), along with University endowments thought this was the easiest money they would ever make. Commodities are only going to go up and here was Goldman Sachs touting "Long-only Index Funds" In Goldman's case the index was their very own GSCI but if the index "investing" didn't give you enough action the pensions could evade position limits by entering into swaps deals to piggyback on Goldie's designation as a "commercial".
Good times. More below the jump.
From the Wall Street Journal:
Pension funds and other institutions are retreating from popular investments linked to commodities after finding they did little to protect their portfolios against inflation risk and the unpredictable returns of stocks.
Investors have yanked nearly $10 billion from tradable indexes tied to energy, food, metals and other commodities after two years of record outflows. That leaves about $133 billion, said Kevin Norrish, a managing director at Barclays PLC. BARC.LN +0.07%
The trend is accelerating this year, analysts and investors said, driven by lackluster returns and looming U.S. regulations that could make these investments more complicated and costly. The reversal could affect the way commodities are traded and temper price swings in everything from cereal to gasoline to gold, some economists said.
Among those scaling back is the California Public Employees' Retirement System. Calpers, the nation's largest pension fund, pulled out 55% of its holdings in commodities indexes in October, after losing about 8% annually over five years, according to the fund's most recent financial statement. That left $1.5 billion of Calpers's assets in commodities indexes, 0.6% of the fund's total. The money was switched to inflation-linked bonds, under a policy that allows Calpers to make quick moves within investment areas based on market conditions, a spokesman said.
Calpers helped pioneer pension funds' push into indexes that track metals, wheat, energy and other commodities. Unheard of a decade ago, the indexes held $155 billion at the end of 2010, up from $65 billion in 2008, according to Barclays.
The money mainly flooded in from big institutions, such as pension funds and college endowments, embracing commodities as a diversification tool and a hedge against inflation risk. Commodities traditionally have delivered modest returns, in line with inflation, and are disconnected from the gyrations of stocks and bonds.
But the new money turned the market on its head. Many commodities seesawed beyond traditional supply-and-demand patterns, and some economists blamed these new "index speculators," who had no stake in the underlying commodities.
Farmers, airlines, oil companies and other producers and users found it more difficult to use futures contracts for their original purpose—to protect themselves against price swings.
The government has been wrestling with limiting investments by speculators. Separately, the financial-regulatory-overhaul law could increase costs and add complications by requiring Wall Street dealers to use a clearinghouse to settle derivatives transactions, including those connected to commodities indexes.
The indexes, meanwhile, have produced smaller returns and the wild price swings that investors were trying to avoid. In May, the Teachers Retirement System of the State of Illinois cited "volatility of commodity investments" in deciding to move $800 million in a $3.5 billion portfolio to "strategies that better protect TRS from inflation."In May of 2008 the Journal's MarketBeat blog interviewed the new head of CalPERS and I got into more back and forth in the comments section than I had time for.
The performance troubles are evident in the S&P GSCI—formerly known as the Goldman Sachs GS +0.45% Commodity Index—a benchmark that tracks a basket of contracts linked to energy products, precious and industrial metals as well as agricultural and livestock products. That index lost about 33% over five years, compared with inflation of more than 6%. Those who invested in another popular index, the Dow Jones-UBS UBSN.VX +0.64% Commodity Index, lost a total of about 25% overall over five years. The declines stem partly from the way commodities contracts work. Unlike stocks, commodities contracts expire, typically monthly or quarterly, and then need to be rolled over into new contracts.
Speculators account for more than half of futures contracts in certain commodities, according to the Commodity Futures Trading Commission. But signs of cooling abound. In April 2012, for example, investors held 225,869 contracts for a wheat traded in Chicago, a record. Now, they are down to 144,487 "Chicago wheat" contracts, the lowest point in several years.
"Calpers turning around and getting out is sending this signal to other institutions," said David Frenk, research director for Better Markets Inc., a Washington-based advocate of financial change. "There is a huge transformation starting to take place."
The group has been a critic of index investing, arguing that pension funds are risking losing money and influencing prices of underlying assets.
Mr. Frenk flew to California in November 2010 to urge the California State Teachers' Retirement System to reconsider an investment of about $2.5 billion it was considering making in commodities, including the DJ-UBS, minutes of the meeting show. The pension fund allocated just $150 million but hasn't invested the money. Given that the index has lost 13% since the meeting, Mr. Frenk estimated, "they saved about $300 million."
Also on the sidelines is the Los Angeles Fire and Police Pensions, which put aside 5% of its $15.2 billion for commodities. So far, though, it has invested only in publicly traded commodities companies. "We haven't gone into indexes," said Tom Lopez, chief investment officer, "but the plan is to be there."
Index investing continued slowing this year, said Michael Lewis, a Deutsche Bank DBK.XE -1.50% analyst. "The role of commodities as a diversification strategy is being questioned because of an extreme market distress."
Climateer wrote :
Re: “…bold, positive changes initiated by his recent predecessors”
Senator Lieberman is doing a little re-write to ERISA right now.
No pension funds in the commodities markets..
Commodities aren’t an “asset class”, they’re what people eat. And use to get to work.
As
a public — not a corporate — pension plan, CalPERS isn’t subject to
ERISA. So if all that the pandering pols in D.C. change is ERISA, it
won’t have any effect at all on CalPERS’ ability to invest in
commodities. But even if CalPERS’ use of futures is limited, they can
instead use unregulated swap contracts with FCMs who likely won’t be
subject to any changes in position limit regulations. So, any changes
would just be window dressing for the same ignorant public that actually
believes it’s pension funds and not government policies (e.g.,
primarily monetary) causing the broad general increase in all
commodities prices; inflation.
It was the swaps comments in Mr. Masters testimony that seemed to wake old Joe up, not the Index part.
.
The banks will ditch the fund business in a second if there is any hint that allowing an outside speculator to evade position limits by swapping, and thus showing up in the COT reports under the ‘large commercial [4 or less]‘ umbrella, would lead to further regulation or even scrutiny of their business.
.
Citi broke out their smallish piece as worth $661 MM.
CalPERS may pay a lot of fees but not enough to get GS to risk the golden goose.
How
many times do we have to endure this sort of conspiratorial idiocy in
human history before it stops?!! How is it that so many people cannot
see past their well-documented, primitive anti-market biases? If prices
rise, blame the speculators! Of course, it’s so obvious! Those evil
capitalists! This time, the twist is that it’s not just the evil oil
companies and traders that are manipulating prices, it’s the pension and
endowment funds!.
The banks will ditch the fund business in a second if there is any hint that allowing an outside speculator to evade position limits by swapping, and thus showing up in the COT reports under the ‘large commercial [4 or less]‘ umbrella, would lead to further regulation or even scrutiny of their business.
.
Citi broke out their smallish piece as worth $661 MM.
CalPERS may pay a lot of fees but not enough to get GS to risk the golden goose.
Liberal environmentalists (like Climateer) are so fond of touting the supposed “consensus” of scientists that support their anti capitalistic bludgeon of anthropogenic global warming (despite the fact that many reputable climate scientists don’t support it), so it’s funny that on this issue not one reputable, trained economic scientist has supported this ridiculous witch hunt against commodity index investors. Funny too how no one, including Mr. Masters, has supplied anything other than naïve speculation that what he claims is true. In fact, all reputable economists who have opined on this notion dispute it.
A previous poster here noted favorably on his blog the other day that the CFTC has been investigating for months what effect speculators have had on oil prices. But somehow he forgot to mention the comments of CFTC Chairman Walter Lukken on Friday that they found no evidence that index investors have caused the run-up in commodities prices. As Lukken points out, some commodities being indexed have gone down this year, while some that aren’t indexed have hit record highs as well. It’s clear some people have an ugly ax to grind.
What’s beyond tolerable about comments by environmentalists here, in particular, is that the price of oil would be decidedly lower if environmentalists, through congressional demagogues like Lieberman, had not banned drilling in so many oil-rich areas, especially offshore and in Alaska. Why doesn’t Lieberman bring in to testify economists who’ve estimated how much that has raised oil prices?...
Actually, I lean Austrian school.
I’m
somewhat familiar with the Austrians, and I don’t know of one that
would support even the existence of a government agency that attempts to
control any aspect of trade, including futures. The Austrians advocate
Laissez Faire, not the statist sentiments underlying the CFTC, or any
congressional inquisitions of any aspect of voluntary economic exchange.
Re; Classical Economics,
Why only go back to Ricardo or Smith? 14th century Classical econ. says what’s yours that I can take by force of arms is mine.
Now that’s classical, baby.
Human society develops rules of conduct to facilitate the greater good.
The intellectual field was called “Political Economy” for a reason.
Reading your half-baked interpretation I am reminded of the great mot juste for some on the hard left:
“Chomsky is the intellectual for people who aren’t as smart as they think they are”.
I see they same lack of intellectual chops in your argumentum.
Toodles
Why only go back to Ricardo or Smith? 14th century Classical econ. says what’s yours that I can take by force of arms is mine.
Now that’s classical, baby.
Human society develops rules of conduct to facilitate the greater good.
The intellectual field was called “Political Economy” for a reason.
Reading your half-baked interpretation I am reminded of the great mot juste for some on the hard left:
“Chomsky is the intellectual for people who aren’t as smart as they think they are”.
I see they same lack of intellectual chops in your argumentum.
Toodles
Climateer:
You’re incoherent at this point and clearly have too much time on your
hands. Ideas are not a game for idle morons to play with; they actually
are important, and you’re clearly out of your depth. “Austrian
economics” is not the same as “Classical economics”, which latter didn’t
exist until the late 18th century, and neither of which advocates the
use of force. Try adjusting your meds. And perhaps find another hobby
other than blogging more in line with your abilities, such as gardening.
Though do avoid the use of any sharp tools.
There are a couple more back and forth, you get the point.
Thanks for the econ lesson. Here’s one for you.
The use of force verbiage is short-hand for the evolution of economic thought in just the last 700 years. The economics of the 14th century was the econ of the Condottieri.
Force of arms trumped all.
In response societies developed rules of conduct, laws, to codify what constitutes acceptable (and unacceptable) commercial behavior.
.
Over and over again you will find proponents of “Laissez-faire” are the first to appeal to the power of the state to enforce their property rights.
So the question isn’t whether one believes in state intervention, it is to what extent and how duplicitous they are in their public pronouncements.
.
Voltaire nailed the concept with “Ils ne se servent de la pensée que pour autoriser leurs injustices, et emploient les paroles que pour déguiser leurs pensées” (Men use thought only to justify their wrong doings, and employ speech only to conceal their thoughts)
.
In the instant case, the commodity markets, there are so many shennaigans going on right now that even Enron would blush.
.
The recent failure of spot cotton prices to converge with the futures on settlement day is just one example of the dysfunction of the markets.
The CBOT’s turning a blind eye to the same phenomena in winter wheat is proof positive that participants will preach “Free-markets” as long as it suits their purposes.
.
Pension funds evading speculative position limits by entering into swaps agreements with commercials is another example of gaming the rules.
This one has the further anti-market effect of transforming a spec position into a “hedge’ in the COT reports, reducing transparency and conferring an anti-market advantage on those who know the true state of affairs.
.
Speaking of Enron, their behavior in the California electricity market was, simply, a fraud on the market.
.
The action of oil prices will give us an indication of where the truth lies. When functioning, the price discovery mechanism is admirable for its signaling ability. When manipulated, it is a fraud on society.
.
The real fun will come with the introduction of artificial markets in carbon.
I’m hearing the same B.S. about “market-based solutions”.
If the prognosticators are right, we are looking at $2 to 4 Trillion in activity with 15% slippage (bid /ask spreads, commissions, fees, bribes etc.)
I’ve got to go run a business now but feel free to respond it you have anything else to share.
The use of force verbiage is short-hand for the evolution of economic thought in just the last 700 years. The economics of the 14th century was the econ of the Condottieri.
Force of arms trumped all.
In response societies developed rules of conduct, laws, to codify what constitutes acceptable (and unacceptable) commercial behavior.
.
Over and over again you will find proponents of “Laissez-faire” are the first to appeal to the power of the state to enforce their property rights.
So the question isn’t whether one believes in state intervention, it is to what extent and how duplicitous they are in their public pronouncements.
.
Voltaire nailed the concept with “Ils ne se servent de la pensée que pour autoriser leurs injustices, et emploient les paroles que pour déguiser leurs pensées” (Men use thought only to justify their wrong doings, and employ speech only to conceal their thoughts)
.
In the instant case, the commodity markets, there are so many shennaigans going on right now that even Enron would blush.
.
The recent failure of spot cotton prices to converge with the futures on settlement day is just one example of the dysfunction of the markets.
The CBOT’s turning a blind eye to the same phenomena in winter wheat is proof positive that participants will preach “Free-markets” as long as it suits their purposes.
.
Pension funds evading speculative position limits by entering into swaps agreements with commercials is another example of gaming the rules.
This one has the further anti-market effect of transforming a spec position into a “hedge’ in the COT reports, reducing transparency and conferring an anti-market advantage on those who know the true state of affairs.
.
Speaking of Enron, their behavior in the California electricity market was, simply, a fraud on the market.
.
The action of oil prices will give us an indication of where the truth lies. When functioning, the price discovery mechanism is admirable for its signaling ability. When manipulated, it is a fraud on society.
.
The real fun will come with the introduction of artificial markets in carbon.
I’m hearing the same B.S. about “market-based solutions”.
If the prognosticators are right, we are looking at $2 to 4 Trillion in activity with 15% slippage (bid /ask spreads, commissions, fees, bribes etc.)
I’ve got to go run a business now but feel free to respond it you have anything else to share.
There are a couple more back and forth, you get the point.
We have dozens of posts on the index investors, Goldman and calling speculation investment, usually along these lines:
Pension
Funds Drive Growth Of Alternative Assets. And: CalPERS Up 68% on
Commodities; Down 31% on Real Estate. Action, Baby, Action!Stat du Jour: "99% of pension funds outperform CalPERS"
CalPERS Playing with Fire
From our Oct. 26, 2008 post, "Calpers Sells Stock Amid Rout to Raise Cash for Obligations":
This is hedge fund behavior, selling your most liquid investments to prop up the illiquid....Commodities: $50 bln in 'long-only funds' flees commods markets. And: Calpers says staying the course on commodities
