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DECEMBER 29, 2003
Gloves for Handling Hot Futures As platinum, copper, beef, and even lowly soybeans command premium prices amid soaring global demand, commodities markets may look terribly tempting to an equities-weary investor. How best to tap into them? Unless you're a professional, stay away from direct investments in futures contracts in these markets -- the stomach-churning volatility and off-putting margin requirements could fast prove disastrous. However, ordinary investors might consider managed futures funds to spread out the still-ample risks and limit liabilities. "Go with managed funds for more diversification," says Daniel Weaver, an associate professor of finance at Rutgers University's business school. Otherwise, he warns, "you can be wiped out quickly." Fortunately, the managers of plenty of such funds want to reach out to individual investors. While many of the best performers turn up their noses at anyone but high-net-worth folks and require $1 million minimum investments, a growing number are looking down-market. "ZERO DIFFERENCE." Investors in funds such as Merrill Lynch's (MER ) JWH Strategic Allocation Fund have been able to command a gain of over 45% over the last three years with minimum stakes of just $5,000. "We have a more diversified client base, and we think that's good business," says Mark Rzepczynski, president of John W. Henry & Co., a Boca Raton (Fla.) commodity-trading adviser that works with Merrill Lynch, Morgan Stanley (MWD ), and other firms on such funds. Even though the rising prices of raw materials such as metals and many agricultural products are a big draw now, managed-futures funds boast that they can make money whichever way prices move -- just as long as there's movement and, better, lots of uncertainty in the markets. "Up or down, it makes zero difference to us," says Christian J. Baha, chief executive officer of Quadriga Asset Management, a Monaco-based outfit that manages $1.1 billion and offers a couple of funds to U.S. investors. "We just need a trend." Aided by powerful computers and dabbling in dozens of markets around the world at once, these fund managers track prices of commodities, financial instruments, and currencies. "Trend followers" then pursue contracts to buy or sell the commodity as the values climb or fall. Contrarians who think the current markets too bullish commonly sell investments short, betting that prices will decline. Others take the stance that futures prices are poor guides to eventual real prices, either always undershooting or overshooting, and they adjust their buying or selling, accordingly. "FUNNY MARKET." "The win-loss record is generally 50-50, but you hope to make a buck half the time and lose only 50 cents the other half the time," says Ira G. Kawaller, an economist who manages the high-net-worth Kawaller Fund in Brooklyn, N.Y. "This is a very funny market, really." Still, even highly diversified global funds can be enormously risky. Many top performers logged stunning returns in 2001-02, when the futures markets were especially tumultuous, but have registered only single-digit gains or even losses this year. That's why some advisers say individuals should make managed funds no more than 5% of their portfolios, expect great swings each month -- and be prepared to lose everything they put in. This still isn't the same as investing in a diversified equity-index fund, where stocks seldom lose all their value. The assets here typically are not the underlying commodities but rather contracts to buy or sell the minerals or agricultural products in the future -- which can prove to be worth a lot or nothing. PLENTY OF MOVEMENT. Other important differences with equity mutual funds exist as well. Fees in managed futures funds usually are high -- sometimes topping 25% if managers of especially successful funds tack on incentive fees. And the managers commonly move in and out of investments rapidly, sometimes several times a day, rather than holding on for many months to see gains. What's more, the funds marketed by big brokerage houses typically spread their trading among several commodity-trading advisers to hike the chances of winning -- and spread out risks. Such differences could make these funds an intriguing and lucrative -- but preferably small -- part of a portfolio. And this year, with global economies rebounding, markets are likely to provide plenty of movement to cash in on. Investing in commodities will still be only for the strong and swift, but the handsome gains could make the risks pay off richly.  By Joseph Weber in Chicago
BW MALL
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