This has been a grim spring for commodities traders. Asia's reeling economies are pummeling the prices of everything from copper to crude, sending the Goldman Sachs Commodity Index down 16% this year to its lowest point since early 1996. But some contrarian investors, perhaps mindful of Warren Buffett's huge bet on silver, are refusing to abandon ship. They argue that Asia should recover in a year or so, and commodity prices will begin to cycle up again. Indeed, John Di Tomasso, president of the Di Tomasso Group in Victoria, B.C., argues that in real terms, commodity prices are the cheapest in nearly eight decades. "If you're a long-term investor, this is as good as it gets," he says.

So should you put a few bucks into commodities while they're dirt cheap? If you have an appetite for risk, you may want to get in. But think twice before you take a flier on soybeans. Although commodities may be bargains today, some 70% to 90% of individual investors lose money in the highly leveraged and volatile futures markets.

Instead of betting on a single commodity, you may be better off investing through a commodity trading adviser (CTA), managed futures fund, or pool. Many offer diversified portfolios and try to navigate shoals by trading in and out of individual commodities with lightning speed. "You aren't buying a market," says Aladin Abughazaleh, president of ATA Research, a Dallas firm that places money with CTAs for investors. "You're buying a manager's skill."

STRONG RETURN. To be sure, those skills haven't saved their investors from disappointment in 1998. The Barclay CTA Index of 327 advisers rose a mere 0.1% through Mar. 30, the latest data available. But since 1993, the CTA index has still produced an average annual return of 8.7%, with only one down year, in 1994. U.S. Treasuries, by contrast, have lost money in two of the past five years.

CTAs also have shown a low correlation with the Standard & Poor's 500-stock index. This means that for every 1% move in the S&P, the Barclay CTA index has moved just 0.06%. Commodities have also shown a low correlation with Treasuries, moving 0.08% for every 1% jump in the Lehman Brothers Treasury bond index. This doesn't mean a sharp drop in stocks or bonds will cause commodities to move smartly in the other direction. But it makes an argument for diversifying into an asset class that doesn't track stocks well if you're concerned that the S&P--up 15% this year and 33% in the past 12 months--has risen too fast.

There are several ways to add managed futures to a portfolio. If you can afford a minimum account of between $100,000 and $2 million, you'll probably go for an individually managed futures account. You select a CTA who makes trading decisions for you. That means giving the adviser full discretion over trading, although you can elect to have the transactions carried out at the brokerage house of your choice. The adviser will give the details of each trade by E-mail, regular mail, or fax. If your investment winds up in the black, you can expect an adviser to take an incentive fee of 15% to 25% of profits after expenses.

Most managers also charge an annual fee of 2% to 6%, and trading costs can add another 2% to 4% to your costs. The fees are similar to what a hedge fund manager earns, and when a CTA is turning in a gangbuster performance, few investors lament the high costs. For example, Bill Eckhardt of Chicago's Eckhardt Trading, who charges a 20% incentive fee on profits plus management and transaction costs of about 4%, has produced a compound annual return of more than 40%--after fees--since 1987. His program, which required a $2 million minimum, is closed to new investors.

LONG-TERM PAYOFF. If a seven-figure commitment is daunting, you may want to look into public futures funds. They're available through full-service brokers or, sometimes, fund operators. They're akin to mutual funds in that they usually have lower minimum investments and diversified portfolios. They are also regulated by the Commodity Futures Trading Commission, which requires funds to file offering documents. But funds remain the most expensive way to invest in managed futures. Unlike mutual funds, with annual expenses averaging around 1.5%, commodities funds have annual management fees of around 2%, plus additional annual costs of 6% to 10%. Many funds trim those costs by five percentage points, however, by returning all or part of the interest they earn on your assets.

In between funds and CTAs are pools. They're generally organized as limited partnerships and are less costly, with annual fees typically running about four percentage points less than those charged by public funds. Most pools require a minimum initial investment of $25,000 to $150,000, however. They also have limits on their size. Regulators permit each pool to accept only 35 "unaccredited" investors--those with an annual income under $200,000 for the past two years or a net worth of less than $1 million, including homes, furnishings, and cars. Pools are prohibited from advertising or soliciting business, but you can research them via a number of sources, including Barclay Trading Group in Fairfield, Iowa (table).

Don't make the mistake of jumping from one hot manager to another. Jack Schwager, a CTA and author of Market Wizards and The New Market Wizards (Harperbusiness), notes that investors often invest with a CTA after the adviser has had a substantial winning streak--and cash out right after the CTA suffers a notable setback. This, he notes, is an excellent way to lose money. A better strategy, says Bruce Cleland, CEO of Baltimore-based futures firm Campbell & Co., is to regard futures as a long-term asset allocation decision that can take three to five years to pay off.

Anyone investing in managed futures should understand the commonly employed measures of risk in the business. One of the most frequently heard terms is "standard deviation of returns." The theory is that the more returns deviate from their average, or mean, the more risky the investment. So a low standard deviation can indicate less risk.

You can use standard deviations to measure futures against other asset classes. For example, common wisdom is that managed futures are always riskier than stocks or bonds. But that isn't always true. In 1997, the S&P index had an annualized standard deviation of monthly returns of 15.3% on a gain of 33.4%. The Barclay CTA Index produced a more modest return--10.9%--but a less risky standard deviation of 8.9%. California Managed Accounts I, a commodity pool with a $25,000 minimum investment (800 888-1987), generated a 14.3% annual return and only a 5.1% standard deviation in the five years ended Apr. 30. It achieved this by parceling assets out to four CTAs whose performances have not been well correlated.

Also pay close heed to the "maximum annual drawdown," or the largest drop in net asset value of a fund or pool within a given period. Some spectacular returns have been generated by managers who concentrate on a specific sector, such as currencies, energy, or agricultural products. When these markets turn choppy, big losses can occur. For example, the Barclay energy traders index plunged 16.2% in the first quarter of 1998.

When investing in futures, you should always ask yourself whether you're prepared to suffer a 15% or 20% drop in assets over a short period. Over the longer run, however, some programs have offered decent returns with low volatility. Because of their low correlations with stocks and bonds, you may want to consider bottom-fishing in futures now, either to speculate on an upswing or insulate the rest of your portfolio against any downturns


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