Commodities
Contracts, Funds & Hybrids
(June 21, 1999)
"Would it be possible
for you to tell me if the following three items are correct or if not -- direct
me to someone who can.
1.
Commodities Contracts -- You need to put up as little as 2% to 10% of the value
of the underlying commodity contract to get in on the action. "
Editor-in-Chief
Courtney Smith: Absolutely true. But you can put up as much as you want. Also
note that you can post treasury bills as the margin so you earn interest rather
than the way it is with margin on stocks where you PAY interest because you are
borrowing money. Futures margin is a good faith deposit.
2.
Commodity Funds -- Is there a secondary market?
Editor-in-Chief
Courtney Smith: No.
They are nearly all structured as limited partnerships with limited liquidity.
3.
Hybrid Commodity Funds Some brokerage firms offer the chance to take a toe-in-the-water
approach to the commodities markets through hybrid instruments that combine a
commodities investment with a safe one. Such hybrids may promise you your money
back if you stay the course, plus a shot at making big money in the commodities
market. Say that you invest $10,000. A hybrid fund may take $6,000 of that to
buy US Treasury zero-coupon bonds that return $10,000 in five years at maturity.
This means that you're fairly well assured of getting your original investment
back if you hold your shares for five years. Your remaining $4,000 goes to a smart
commodities manager who may just get you a nice additional profit. The problem
with these funds is that they are expensive. One popular offering collects a fee
of 6% per year on total net assets?even on funds just sitting there, invested
in Treasury zeros. As noted in the fine print in the prospectus, that's equivalent
to a 15% annual fee on the $4,000 you have invested in commodities. You could
do a lot better on your own by finding a less risky speculation and buying your
own T-zero.
Editor-in-Chief
Courtney Smith: Yes, these are called guaranteed funds because they usually
guarantee your funds back at the end of a certain time period, usually 3 to 5
years.
