Recent downward movements in the commodity market has gotten investors thinking there’s got to be a better way to make money than relying on the indices that track it. One solution, suggests Reuters, are commodity hedge funds, which abandon the long-only approach for the long/short variety. “For us, it doesn’t make sense to buy long-only,” Luc Estenne of Partners Advisers told Reuters. “Long/short is the best way to play commodities. There is…volatility and potentially a lot of returns.” The problem with the old approach, he says, is that many commodity indices are too heavily weighted toward energy. The largest of the bunch, the Goldman Sachs Commodity Index, for example, placed a lot of bets on crude oil – and is down some 20% since August. Growing hedge fund involvement in commodities, which is expected to increase from $60 billion now to more than $100 billion at the end of 2007, is welcome. Index money, says John Kemp of Sempra Metals in a Reuters interview, “has sucked liquidity out of some markets because it has all come in on the (long) side…If hedge funds and others are present on both sides of the market in significant numbers, liquidity should improve substantially.” Defenders of indices, such as Mark Mathias, CEO of Dawnay Day Quantum, remain firm in their support, saying, “An index is still a sensible place to start for those who are unfamiliar with commodities and want to diversity.”
