funds by the fact that the index it’s written. Other more draconian negative. This has resulted in tens
funds are always long, never short. antispeculative legislation has been of billions of dollars being switched
Additionally, index funds take a proposed at by various senators, out of equities and into commodity
passive approach to the market with which would severely restrict invest- index funds. Earlier this year, before
a long-term, buy-and-hold policy, ment in commodities by pension the big sell-off in most commodity
moving their long positions from funds and index funds. markets – especially crude oil – index
one delivery month to the next. Many think this unwise. Consider funds’ investments were estimated at
This approach has been very that for the last two years, the stock over $200 billion vs. almost nothing
successful, inducing many new market has been mostly lower while less than 10 years ago.
customers into the commodities commodities have rallied sharply. However, this last quarter, which
markets. (Index funds, like con- If pension funds were limited to ended September 30th, has been
ventional funds, trade a variety of investing in stocks, they would have extremely negative. The 5 largest
commodities besides the grains; achieved much lower returns than index funds are down an average of
trading especially heavily in the en-
ergy market, for example.) CalPERS,
the California Public Employees ‘Farmers shouldn’t let index fund
Retirement System, is the largest
pension fund in the U.S. with assets trading dictate their marketing
of roughly $240 billion. Two years
ago, CalPERS began trading com- decisions . . . . funds are followers of
modities for the first time through
an index fund. the market.’ vic lespinasse
Recently, they announced they
have done so well they are going to
sharply increase their investment they have realized by investing in 25% for the quarter, putting them
by several billion dollars over the a combination of stocks and com- down 2.4% for the first 9 months of
next two years. CalPERS is consid- modities. When stocks are doing the year, despite strong returns the
ered a leader in the pension fund poorly, such as over recent years, it first 6 months of the year.
industry, and other pension funds is important that investors are able The S&P GSCI (Goldman Sachs)
have followed their lead, increasing to diversify their investments to index fund is the largest in the
the importance of index funds in improve their returns. Barring or industry. Whether coincidentally
the commodity markets. If it wasn’t limiting investment in commodities or not, many commodity markets
for index funds, commodity prices, by any group would, thus, be coun- have exploded to new all-time highs
including grains, would likely be terproductive. over the last couple of years, includ-
lower. But by how much, it is dif- Currently, the CFTC classifies ing grains. Prices have doubled or
ficult to judge. index funds as hedgers, since they are tripled in a relatively short time
So, index funds can be regarded as said to be hedging inflationary risks compared with normal prices in the
a positive influence in the market, at through their use of the futures mar- grain market.
least as far as farmers are concerned. kets rather than outright speculation. Here are four steps farmers can
take to learn more about the fund’s
activity in the grain markets.
Pending legislation imPressive returns for funds
There is legislation pending in The results of index funds’
Congress that would limit the ability buy-and-hold strategy have been CheCk CftC rePort of index and pension funds to invest impressive over the last couple years. Farmers should stay aware of in the commodities markets. A bill The five largest index funds have the activity of the index funds by giving the CFTC more power to had returns of up to 40% a year. At checking the supplemental section of regulate the markets already passed the same time, returns in the equity the commitment of traders report the House but is yet to be voted on (stock) market have been poor, even every Friday afternoon. This report in the Senate. But the White House shows how long the index funds has indicated it will veto the bill as (that are never short) are in each of
References:
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