MERCHANDISER
Implications of Index Rebalancing
The S&P GSCI and the DJ-UBS Commodity Indices recently released preliminary 2011 weightings. Rebalancing will take place in the first few trading days of January. As natural gas has under-performed meaningfully
throughout 2010, Morgan Stanley believe that it will likely see the most noticeable impact, with inflows estimated at US$2.1 bn, or some 6% of current open interest. The energy complex in aggregate should see additional buying of US$3.4 bn. The agricultural space on the other hand, having outperformed meaningfully, will be sold. Morgan Stanley estimates suggest that grains and
softs will see net selling of US$1.8 bn and US$0.8 bn, respectively. In the metals space, we expect a net outflow of around US$307 mn as inflows into gold and zinc only partially offset the roughly US$204 mn and US$753 mn that will be sold in the nickel and silver markets, respectively. The impact of rebalancing on price is, unfortunately,
neither definitive nor consistent. In January 2010, only metals price direction reflected rebalancing flows. Energy and agricultural commodities had seemingly priced the rebalancing in beforehand, and price action over the rebalancing period actually moved contrary to the direction that flows from the rebalancing would have suggested. The S&P GSCI determines an individual commodity’s
weight in the index by looking at the world production value of the various commodities in the past five years, with the goal of providing an economic indicator as well as a measure of commodities investment performance. The idea is that commodities with a higher production value impact the world economy more and therefore, should be more heavily weighted in the index. The DJ-UBS Index takes a slightly different approach,
examining liquidity as well as production value in determining weightings. Hence, a commodity product with a higher traded volume will command a higher weighting in the DJ-UBS Index compared to a commodity with a lower traded volume, ceteris paribus.
Launching: The Barclays Capital
Commodities Research Rankings The past decade has seen commodity investments move from the fringes of the investment universe to become one of the most high profile alternative asset classes. Between the end of 2004 and the end of the third quarter of 2010, total assets under management rose from US$55bn to US$320bn. Commodity indices are the main way in which
institutional investors have gained access to the beta of commodity markets. As investors have become more experienced with commodity assets, the demand for more sophisticated ways to gain exposure has grown. So far, beta enhancement has focused mainly on ways
to minimise negative costs of carry and improve index performance by shifting exposure to points further out along the futures curves, where cost of carry/negative roll yield has tended to be less onerous, particularly in the past few years. Increasingly, investors are also seeking to exploit alpha or skill-based returns from commodity assets. So far, this approach has focused on two types of strategies: positioning algorithms that combine dynamic long/short exposures to take advantage of changes in curve shape via a range of technical signals; and trading algorithms that employ technical and fundamental signals to combine long/ short exposures to individual commodities. The Barclays Capital Commodities Research Ranking
approach takes alpha generation a step further. By creating a system that can be used to overweight or underweight different commodities and commodity sectors based on the views of the Barclays Capital commodities research team, Barcap are creating a framework which can be applied to existing index strategies to create a research-driven, fundamental component of commodity index returns. Rankings will be updated on a monthly basis in
the Barclays Capital Commodities Research Rankings publication, which will be made available on the Cross Commodities page of Barclays Capital Live. The report will include updated rankings and short explanations of their drivers by market. The report will also track the performance of the rankings as applied to the base portfolio. The first report in the series will be published in
January. For more information contact the Barcap Research team.
www.barcap.com
• TRANSMISSION • ASSET VALUATION • TECHNOLOGY • HEDGE FUNDS • ELECTRONIC • CARBON TRADING • • INVESTING • FEEDS • PRIVATISATION • INVESTMENT • AUTOMATION • DERIVATIVES • FORECASTS • ETFs •
• CONTRACTS • PORTFOLIO • 14 December 2010
• NICKEL • ELECTRICITY • COCOA • OIL • PULSES • SOYBEANS • NATURAL GAS • GRAINS • FUTURES • VAR • •OPTIONS •COFFEE •SOFTWARE • ALUMINIUM • EXCHANGES • SILVER • OTC• BANKS • TRADING • RESEARCH • • COAL • ANALYSIS GOLD • SUGAR • FORWARDS • TIN • INDEX • PLATINUM • TEA • LEAD •EMISSIONS • RUBBER • • MINING • CLEARING • SWAPS • PALLADIUM • CONCENTRATES • WEATHER • RENEWABLES • DEREGULATION • • ZINC • DIAMONDS • ONLINE TRADING • CFDs • BUY • INTERNET • COPPER • RHODIUM • • CLIMATE CHANGE • STEEL • REGULATION • RISK MANAGEMENT • TRADING SYSTEMS • SELL • WAREHOUSING • • NUCLEAR • EMERGING MARKETS • ENERGY STRATEGIES • GREEN CERTIFICATES • CO2
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