Institutional Investors Dominate Commodity Investments

(February 24, 2011) — According to a recent report by Barclays Capital, net inflows to commodity-related investment are expected to remain strong in 2011, driven largely by institutional investor demand.

“The return of the institutional investor, massive inflows into precious metals led by the desire to hedge against financial market risk, and the gradual shift towards active management of commodity strategies were among the key stories of the year,” the Barclays report said.

The report showed that commodity investments stood at $376 billion as of December 31, 2010, up from $270 billion the previous year. Institutional investors accounted for a large percentage of the total, with a record $8 billion of inflows in December. Barclays’ estimated that for the year, net institutional inflows accounted for almost 75% of the total inflows at $46 billion.

In December, the firm released a survey that showed hedge funds and institutional investors predict a bigger inflow into direct commodity investments than in 2010 as the economy continues to improve, increasing demand for metals, grains, and energy. When those surveyed were asked how they plan to invest in commodities over the next 12 months, 43% chose active management, while only 7% expected to use index swaps.

Absolute returns were the primary motivation for commodities investors, according to 36% of respondents in the London-based bank’s survey. Meanwhile, 75% of respondents said they expect commodity inflows of $50 billion or more in 2011, which would match or exceed investment in 2010. The majority of those surveyed anticipated maintaining (22%) or increasing (69%) commodity exposure over the next three years. Copper will probably have the biggest gain next year, followed by grains and crude oil, according to the survey.

The Barclays Capital survey in December included respondents from 300 investors — 40% were hedge-fund managers. Institutional investors, such as pension funds and endowments, accounted for 40%, and the remaining being firms distributing to retail investors.