State owned funds invest 20bn in commodities

Sovereign wealth funds have invested almost $20bn in commodities futures, according to fresh data from US regulators. It confirms for the first time the presence of state-owned vehicles in the commodities market.

The Commodity Futures Trading Commission, the regulator of US commodity markets, said in a report SWFs accounted for about nine per cent of the $200bn invested in commodities indices at the end of June.

Bankers have in the past said the secretive SWFs were investing in commodities – with some buying gold to hedge against the US dollar and others, particularly the Middle East-based ones, investing in agriculture.

But until now, there was no official confirmation of their widely rumoured presence.

SWFs’ investment in the commodities market attracts attention because of fears about control of strategic assets.

Most state-owned investment vehicles draw their income from their countries’ exports of raw materials such as crude oil, natural gas or copper. As commodities prices have risen in the past years, the SWFs’ cash-in-hand has soared.

With worldwide state reserves of more than $3,000bn, some worry any movement into the relatively small commodities markets could influence prices.

Bankers, however, said the shift into commodities was part of the nascent SWF diversification strategy rather than a deliberate attempt to increase their control over strategic raw materials.

The state-owned vehicles have been moving away from safe but low-returning bonds and they are starting to invest in alternative assets, such as private equity, real estate, hedge funds and commodities.

Commodities protect against a rise in inflation, which lowers corporate earnings and stock prices as a consequence. Inflation typically results in higher interest rates, which often leads to lower prices of government and corporate bonds.

The new figures came in a CFTC staff report on swap dealers and index traders, seen as the best account to date about financial investors in commodities.

http://www.ft.com/cms/s/0/4692c9b6-80e7-11dd-82dd-000077b07658.html

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State owned funds invest 20bn in commodities