Singling out pension funds for the attention of lawmakers during the May 20 hearing was Michael W. Masters, managing member and portfolio manager of Masters Capital Management LLC, a long/short hedge fund based in the U.S. Virgin Islands. Masters Capital, does not invest in commodity futures.What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: institutional investors, Mr. Masters said at the hearing.
In an interview, Mr. Masters said that unlike traditional speculators who buy and sell commodity futures, institutional investors have adopted commodities as an asset class in recent years, and are using indexing strategies to invest in them.
Instead of buying and selling futures like a traditional speculator, the institutional investors hold the investments for the long term, betting that commodity prices will increase. Institutions also use commodities as a hedge against inflation.
How many people working at a university or for the state of California driving an hour each way to work know that their own pension fund or endowment is driving up the price of gas for their drive home? he said.
This is more of a social justice issue, he said. There are people on the opposite side of the world who are missing a meal because of this asset allocation stuff, and thats why I wanted to bring it up.
One commodity industry source, who asked not to be identified, questioned Mr. Masters credentials because hes not a commodity futures trader.
There were grains of truth to what he said (at the hearing), but the overall picture he painted was inaccurate, this source said.
But Mr. Masters said his firm trades lots of derivatives and understands how the commodities markets work.
Of course commodities people are going to be upset because this could cut into their business, said Mr. Masters, who also is a partner in a venture capital firm with distressed-debt financier Wilbur L. Ross Jr., called Masters Capital Nanotechnology Fund LLC, Chicago.
Mr. Masters said a commentary he wrote for hedge fund clients came to the attention of Mr. Liebermans staffers several months ago. His firm is putting the final touches on a study on index commodity futures investments that will be released in June, he added.
Pension fund officials contacted for this story said they dont believe their commodity investments are having a major impact on prices for consumers.
The $248.2 billion California Public Employees Retirement System, Sacramento, has a total of $1.1 billion of its assets invested in commodity futures, less than one-half of 1% of total assets, said Clark McKinley, a CalPERS spokesman.
In our view, thats not hyper-speculative, Mr. McKinley said. Its not as though were going bonkers on this.
Mr. McKinley conceded that CalPERS commodity futures investments were a factor in pushing up commodity prices. But we think its a relatively insignificant factor, Mr. McKinley said.
Judy Schub, managing director of the Committee on Investment of Employee Benefit Assets, Bethesda, Md. an organization representing 110 corporate pension plans with total assets of $966 billion said CIEBA member pension plans had a total of 44 basis points of their assets some $4.1 billion invested in natural resources as of Dec. 31, 2006 the most recent numbers available.
Theyre not going to have the concentration to move markets, Ms. Schub said. Indeed, Ms. Schub suggested that federal lawmakers shift their focus to hedge funds from pension funds We know there are hedge funds that have very large positions in oil and gas and are operating in ways that are influencing markets, she said.
Mr. Masters, however, said the $1.1 billion that CalPERS has invested is far more significant in the commodity futures market than it would be in the capital markets. But more importantly, its not CalPERS, its everybody that looks and acts like CalPERS collectively that causes the issue, Mr. Masters said. It all adds up.
Mr. Masters said numbers his firm had crunched from CFTC data showed that as of March 31, $260 billion was allocated to index replication strategies in commodities futures, with the vast majority of that from institutional investors, including endowments, pension funds and sovereign wealth funds.