UNG fund secures $500million gas swap

Exchange traded fund (ETF) the United States Natural Gas Fund (UNG) entered into a natural gas total return swap for $500 million at the end of the last week, following a $250 million bilateral gas swap secured in July.

The fund has come under particular scrutiny in recent Commodity Futures Trading Commission (CFTC) hearings about energy position limits and hedge exemptions. These swap transactions are part of the UNG's strategy to reduce its holdings in listed futures contracts, says John Hyland, chief investment officer for the United States Commodity Funds, the general partner and manager for the UNG ETF.

"This is an attempt by UNG to deal with whatever new regulations may be introduced by the CFTC and to allow us to permit creations of new shareholder units for investors," he says. "These natural gas-based swaps are not enough by themselves to allow us to either meet what we think such potential CFTC levels might be, or to permit us to prudently allow new creations. Still, we are making very good progress."

Depending on the exact shape of new rules introduced, the fund will have to use a wider range of investment alternatives says Hyland. "Using alternatives may just turn out be a more expensive way of doing things for our shareholders. It could lead us to take on certain kinds of risk which we presently don't have to take, or don't have to take very much of, and at the far extreme, it could lead to the fund having to find a way to become smaller," he says.