Barclays Capital Survey Finds Commodity Investors Predict Higher Returns

(December 10, 2010) — Hedge funds and institutions are increasingly turning toward commodity investments and are employing active as opposed to passive strategies to do so, according to a Barclays Capital survey.

“The survey results show that institutional investors plan to continue deploying new capital into this asset class and expect healthy returns in 2011 and beyond,” Kevin Norrish, Managing Director, Barclays Capital commodities research, said in a statement. “The challenge for them is to find the right strategy to achieve those returns, and it is clear that active strategies are increasingly coming into favor.”

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 are 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 anticipate 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 survey 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.

In related news, recent research released by Goldman Sachs Asset Management (GSAM) has shown that commodities are looking less risky following the credit crunch.

“Commodities may provide downside protection during periods of economic or political shock, as tangible goods with pragmatic usage become more appealing,” Brad Yim, portfolio manager, asset allocation and commodities at peer Castlestone Management, told Global Pensions. “Commodities have the rare characteristic as being an investment vehicle as well as an insurance.”

Heightened confidence in commodities by institutional investors is reflected in the Caisse de Depot et Placement du Quebec, Canada’s biggest pension fund manager, aiming to increase investments in energy and minerals. According to Bloomberg, Chief Executive Officer Michael Sabia said that investment in natural resources would position the fund to benefit from an unexpected commodities boom. More than half of the pension fund manager’s US-listed stock holdings are in energy and materials, Sabia told Bloomberg News in an interview in late September. “Natural resources, energy, those are areas where we think there’s an opportunity to play offense because of what the structural trends are and what our capabilities are,” he said.