October 2008
Commodities: $50 bln in 'long-only funds' flees commods markets. And: Calpers says staying the course on commodities
...I am looking forward to CalPERS quarterly results. While the recent ugliness won't have an immediate impact on their ability to meet their promises to retirees, I'm guessing that it will end up being a good thing that they can make up any longer-term shortfall by taxing California residents. This could get serious.We have a couple hundred posts on Goldman and the index buyers but we weren't the only ones. Here's Izabella from March 2009:
Regarding the long only commodities "investors", look for a hit to Goldman's earnings. As proprietors of the GSCI they have at least half the "roll" business. Assuming 2% slippage (fees, spreads, commissions) on the $50 Bil. just removed from the markets and you have $500 mil. in gravy they won't get to put on their spuds....
Oil: Beware the Rolls of March. And: Spreaders Heed Schork (USO)
Oil-invested index funds like the Dow Jones AIG commodity index, the S&P GSCI and the United States Oil Fund begin to rollover their positions from the April front-month WTI contract to the May one this Friday.....And looking at the similar effect on the USO a month earlier:
U.S. Oil Trust Investigated by CFTC (USO)
Appropriately enough, here's Izabella with the latest.
From FT Alphaville:
How the dumb money was set up for commodity failure
Here’s a great chart from Emad Mostaque, a strategist at Ecstrat, a new research company set up by Mostaque and former head of EM strategy at Deutsche Bank John-Paul Smith:
As Mostaque explains, even though commodities are at double the level they were in 2003, any investors who assigned money to commodity GSCI products in that period on a total return basis may be sitting on zero returns.
In fact, the relative return of the S&P GSCI Total Return versus the spot index for the last decade shows an astonishing -12 per cent annualized “cost of ownership” on the roll yield up to the Arab Spring of 2011. This is a level far beyond that which would have been implied by the curve structures, he says.
As Mostaque further notes:
Indeed, even with energy commodities, which make up the bulk of the index in huge and unsustainable levels of backwardation since 2011, the total return index still hasn’t managed to achieve a reasonable roll yield. For investors this has been a painful experience and one would question why anyone would invest in a commodity index even if they believed in the story. This is likely to drive further definancialisation and improve overall market function, even if prices overshoot near term.What’s worth bearing in mind, of course, is that much of this will have been a zero-sum game, meaning for all those who lost there were others who gained.
If the theory is correct, the sell-off we’re experiencing in commodities now could thus be part of a greater commodity definancialisation effect — the dumb money effectively figuring out just how they’ve been gamed and refusing to carry costs and losses further.
How this process came about, notes Mostaque, was through the well finessed practice of selling products linked to commodity indices to “real money” investors on the basis of three stories:
1. Emerging Markets would buy all the commodities in the world, presumably leading to a Mad Max type scenario eventually but riches for investors in the meantime
2. Commodity returns were uncorrelated with other asset classes, something highly regarded by those that followed the Yale Endowment Model
...MORE3. Commodities tended to normal backwardation, where the front end of the curve was above the back end, essential as investors would not own the physical commodities but rather the futures. By selling high and buying low investors would realize a nice gain on their positions even if commodities were flat
Remember, there are only three places to get a profit in commodities:
1) The interest on your collateral
2) The roll yield
3) The change in price
If you are at zero or negative on the first two you had better be very good at figuring out number three.
Related:
"CalPERS fails to make money in commodities: John Kemp"
The GSCI is heavily weighted toward the oil complex, maybe not the place to be in a declining market.
Watch out for those fast-talking product pushers.
Cassandra Does Alt Investing the CalPERS Way
This is beautiful..
From Cassandra Does Tokyo:
...MOREValued Advice
Memorandum
To: Bea Wethervane, Senior Consultant, Coxbridge Associates
From: Hugh G. Shortphall, Florida University & College Teachers Pension Fund (FUCT)
Date: 31st May, 2013
Subject: Hedge Fund Allocations
_____________________________________________________________
I've appreciated your valuable advice to our plan over the years. As you know, the path to changes in orthodox investment policy in a plan such as ours is often long and arduous, particularly when trustees and oversight committees are involved. Witness our struggle to add mortgage derivatives, or expand our equity allocations with a dedicated BRIC component which we finally received approval for, and implemented in 2007. Our campaign to add a GSCI Commodity Index component, as per your recommendation, was not easier, though with your help, we finally gained approval for and deployed it in mid-2008. Your 2009 advice to implement a dedicated equity tail-risk program - one that we finally allocated to in Sep 2011 - was a big-step forward towards insuring our Board, Trustees (and plan members) could worry less about funding levels in the event of a market crash.
See also "Public Employee Pensions Face Up to the Scam of 'Commodities as an Asset Class'"
and the FT in 2007 "Goldman Sachs and its magic commodities box".
