Small private banks wanting to offer their clients investments in soft commodities are increasingly using hedge funds as a point of entry. Interest in commodities has risen as high-net-worth investors seek diversification, but small private banks lack choice when offering third-party products.
Although oil and metals investments tend to be on the menu at most fund managers, such commodities as coffee, orange juice and sugar are often left to the small community of commodity traders being deemed to be too complex. As a result, private banks are looking increasingly to hedge funds.
Charles du Marais, director of wealth management firm Banque Bonhôte says: ?Hedge fund managers have a deeper knowledge of commodities as they tend to have worked as traders and are aware of the structures. Fund managers, on the other hand, are put off, as they do not understand issues such as shipping costs or quality variation. There are of course the larger houses like Merrill Lynch, Goldman Sachs and Morgan Stanley which offer specialist commodity funds, although hedge funds tend to use these as a prime broker anyway.?
Interest in commodities is expected to grow further among high-net-worth investors as they become better educated in financial products. ?Our clients now come to us and ask about commodity investments based on what they have heard or read in the news,? says du Marais. However, these tend not to cover soft commodities in much detail, he points out. One segment of the sophisticated high-net-worth-individual pool that is driving soft commodity investment comprises hedge fund managers themselves. Says du Marais: ?More and more hedge fund managers are approaching private banks as they become wealthy, in a bid to diversify their investments away from their own fund, and they know more about the market. In turn, this gives us ideas for our other clients.?
One commodity that tends to be included in considerations by hedge funds, yet not by fund managers, is sugar. The price of sugar is stable but Du Marais suggests that it could rise with the increasing use of ethanol as an alternative and more environment-friendly fuel.
Ethanol, made from sugarcane juice or starch crops, can be mixed with or added to petrol to allow auto engines to completely combust the fuel, creating fewer emissions.
The recommended mixture for unmodified engines is 10% ethanol and 90% petrol, but car manufacturers such as General Motors and Ford have been developing engines to run on 100% ethanol. With increasing pressure on governments to promote cleaner environment policies, demand for ethanol as an alternative fuel looks set to increase.
More than 50% of Brazil?s sugar cane supplies go towards the production of ethanol. The country itself consumes nearly four billion gallons annually in fuel mixes of up to 24% ethanol, but du Marais believes the growers are unaware of the future and global demand for ethanol which will ensure prices remain high.
