Thursday, August 31, 2006

Commodity Investors "Should look to Hedge Funds"

By Daniel Magnowski

LONDON (Reuters) - Investors in commodities should look to actively managed hedge funds rather than passive indexes to get exposure to the asset class, UBS Wealth Management said on Wednesday.

Actively managed funds can time buying and selling of securities to take advantage of market opportunities, rather than sit on long positions of various commodities, as the indexes do.

Active funds can so avoid value-destroying market movements such as negative roll yield -- the cost of holding onto a security whose long-dated future price is higher than its current price.

"Given the high cyclicality and the expected changes in commodity markets in the future, investors may want to engage in a more active selection of commodities and not invest passively," UBS said in a report.

The vast majority of investment in commodities, which bankers reckon might be as much as $200 billion (106 billion pounds), is through passive indexes like the Goldman Sachs Commodities Index, but UBS said hedge funds might be a better bet.

"Investors may want to engage in more active investment strategies in this asset class. In this case, commodity hedge funds many provide a valuable alternative to a passive index-oriented investment in commodities," the Swiss bank said.

It advised that investments in natural resources would do well in years to come because greater quantities of products such as oil and industrial metals would be used in emerging markets as these countries become richer.

"The income of the average citizen in an emerging market country will likely improve relative to that of an average citizen in developed countries...future growth in demand will likely flow from emerging markets," it said.

The price of three-months copper futures on the London Metal Exchange has doubled in the past year, while crude oil is more than 10 percent more expensive now than it was 12 months ago.

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