COMMODITYINDICES
FIGURE 4: BREAKDOWN OF OPEN INTEREST BY TYPE FOR COCOA & WHEAT
Sources: CTFC, S&P GSCI, DJ-AIG, Lehman Brothers estimates
public rolling calendar structure and cross-commodity weightings, index non-commercial investors, which
we can provide an estimate for both the total AUM and the net many view as a measure for traditional
financial investment into every one of the 25 commodities covered ‘speculator’,indexinvestorsare smaller
bythesetwoindices. andrelativelystable.Figure4showsthe
Sohowlargeareindexinvestors?Inabsoluteterms,overallAUMof breakdownforcocoaandforwheat.
commodityindiceshasrisenimpressively.Fromnegligiblesizein2003, Butfromanindividualtraderperspec-
they reached an estimated US$76.7 billion in January 2006 and bal- tive,indexinvestorsagainappeartobe
looned to US$297 billion by June 2008. Of this US$219.3 billion the elephants of the trading pits.
increase since 2006, US$98.1 billion has been new financial inflow, Dividing the total index open interest
with the remainder due to the appreciation of the underlying com- by the number of reported index
modities. Table 1 shows the growth in the total AUM of commodity traders, we can solve for the average
indices. For WTI crude oil, we estimate that commodity indices now trading size of index investors. We can
accountforroughlyaquarterofalllonginterestinpaperoil. do this only for the 12 agricultural
commodities, as our method cannot
... the strategic motivations for investing in estimatethenumberofindexinvestors
commodities have become increasingly blurred
inthenon-agriculturalcommodities.
Giventhatthereareonlyahandfulof
Theavailabledatasuggestdramaticabsoluteincreasesoffinancial index vehicles making strategic portfo-
index investment into commodities. However, our discussion above lioallocationsonbehalfoflargeinstitu-
suggeststhattheinflowmustalsobeunderstoodinthecontextofan tional clients, it is not surprising that
explosivegrowthofthebroadermarket.Asapercentageoftheover- the average position size of index
all size of the market and relative to non-index non-commercial investors surpasses the average size for
traders, index positions stay relatively flat, with only scattered bothcommercialtradersandnon-index
increasesinvariouscommodities.Wealsoseethatcomparedwithex- non-commercialspeculators.
As Figure 5 shows, for some commodi-
Figure 5: Average Size if index as a % of Speculative
ties such as wheat, the average index
Position Limits
trader size exceeds the speculative posi-
tionlimitimposedbytheCFTC,providing
evidencethatthe‘swap’loopholeallows
institutional investors to exceed the lim-
itsimposedonregularspeculators.
WhatCausesIndexInflows?
We can divide the motivations for
financial investment into commodity
indicesintwocategories.First,thereare
strategic reasons for investing in com-
modities.Commoditieshavegooddiver-
sification properties, as they serve as
Source: CFTC
excellent hedges against dollar and
COMMODITIES NOW SEPTEMBER 2008 45
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