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TheStreet Open House

Commodities Funds Add Portfolio Diversity and Risk

Investors who view the stock market rally with as much caution as pleasure, and see bonds vulnerable to rising interest rates, might want to look at commodities funds as a way to diversify their portfolios.

But they are not for everyone.

Refco's recent launch of its S&P Managed Futures Index Fund is a push to get a broader range of investors into strategies that are typically limited to the very rich, and maybe grab a bit of Pimco Funds' market share in the process.

The managed futures fund, which Refco hopes will pull in $300 million in its initial sales push, puts money into accounts run by the 14 commodity trading advisers who make up the S&P Managed Futures Index. For a $10,000 minimum investment -- or $3,000 for retirement accounts -- Refco is giving access to commodity powerhouses such as John W. Henry & Co., Hyman Beck & Co. and Campbell Financial's metals and energy portfolio. To invest in these commodity hedge funds, which buy contracts on the future prices of commodities such as metals, oil or soybeans, investors normally need to pony up a minimum of $1 million, or even $5 million depending on the fund structure.

At first glance, the Refco fund is a promising setup, since the fund is structured for maximum liquidity and the index is up a romping 10.29% for the year to date. But commodities are volatile. Between 1998 and 2002, the index notched 25 months of net losses in a five-year period. Many investors may not be able to live with that seesaw effect, even though the index has had positive annual returns since 1998. The index was up only 5.7% in 2001, but posted a robust 20% in 2002. In comparison, the S&P 500 was down 13.04 in 2001 and 23.37% in 2002, before rebounding with a 26.38% gain in 2003. (The S&P Managed futures index was up 8.89% in 2003.)

"What would the goal of the investor going into this fund be?" asks Ron Roge, a Bohemia, N.Y., financial planner. He says most investors don't know enough about commodities to wade in, even if this asset class is demonstrably uncorrelated to stocks and bonds.

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