Fighting the Grinch in Commodities Roll

Chidem Kurdas

Most of the money going into commodities goes to index investments. These suffer from a perennial problem regardless of what’s happening in markets for commodities, known as the negative roll yield. Investors can lose money even when the basket of commodities the index represents gain value. Commodity hedge fund people will tell you that to escape this horror you should give the money to them – for a higher fee, of course – instead of putting it on an index.

A few mutual funds and ETFs offer strategies that reduce the damage from the roll—that is, the loss from replacing expiring futures contracts when new contracts cost more than expiring contracts.  Among them is a fund from Forward, a San Francisco-based $5-billion manager. Nathan Rowader, director of investments at Forward, says the mutual fund format is extremely flexible and allows you to do a lot of what you do in a hedge fund, while investors get better transparency and lower fees.

The Forward Commodity Long/Short fund tracks the enhanced version of a Credit Suisse index, CR MOVERS, constructed to mitigate the negative roll yield. Since January 1998 this index made an 18% annualized return, a much better track record than other commodity indexes.

Investors say they want to invest more in commodities. But in the past decade the well-known commodity index, S&P GSCI, lost 9.8% a year from rolling expiring contracts into new ones. During that time the return on physical commodities  was positive 9.1% annualized. The two numbers demonstrate how potent a force negative roll yield has been in recent years—it more than wiped out commodity price gains. Net S&P GSCI had a small positive return (1.5%) during the period, thanks to interest revenue on the collateral.

Nevertheless, most investors continue to prefer index investments. So the race is on to defeat the Grinch in the roll.


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