Pension funds are increasingly investing in commodity indexes to diversify their portfolios, according to a recent Lehman Brothers report.The bank expects $25 billion to be invested in commodity indexes, such as the Lehman Brothers Commodity Index and the Goldman Sachs Commodity Index, during 2007. This passive investing has had the effect of rallying the price of crude oil by 7% since lows in mid-January, the report claimed.
However, Andy Green, European director of consulting at Mercer Investment Consulting, commented: “Given current market conditions, passive investment in commodity futures may not be as beneficial as investing directly in energy and mining shares, or in actively managed strategies.” He added that since the market is in contango, where longer-dated futures contracts trade at a premium to the spot price, more traditional commodity futures-based index strategies' returns were reduced. This is due to the so-called negative roll yield that occurs when passive index investors sell an expiring front month contract and buy the subsequent month contract.
Topics: Lehman Brothers
More on Structured Products
Hedges required to lock in performance on constant currency terms impact product pricing
Product born in 1990s Japan's low yield environment set for global stage
Strict classification of structured products into 'complex' and 'non-complex' criticised
HNWs got burnt in the Lehman crisis and are still cautious over exposures
Sign up for Risk.net email alerts
Sponsored video: MarketAxess
Sponsored video: Tradeweb
Multifonds talks to Custody Risk on being nominated for the Post-Trade Technology Vendor of the Year at the Custody Risk Awards 2014
Sponsored webinar: IBM Risk Analytics
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.