A Chaperoned Plunge Into The Pits

At one time, playing the commodities markets was truly for the stout-hearted. Because futures contracts are bought on margin, your potential losses could far exceed your initial investment. But in recent years, brokers have made it simpler and somewhat less risky to take the plunge--through managed commodity funds. For as little as $5,000, you can buy shares in pools overseen by professional traders.

Commodity funds provide some protection against hair-raising shifts in futures markets. That's because they spread their dollars among a mishmash of investments, from pork bellies and soybeans to Treasury bonds, currencies, and gold. Nearly all fund managers seek to identify and capitalize on trends. Given the stock market's recent runup, for example, trading has been brisk in stock-index futures.

Payoffs can be big: The 194 funds tracked by Managed Account Reports gained 21.2% last year, compared with the Dow's 4.3% decline. But the funds' diversity can't always shield against `he ill effects of erratic markets. The gulf war wreaked havoc on oil, foreign currencies, and other markets, scuttling the funds' trend-following systems. As a result, the funds lost 2.1% of their value through the end of March.

With the volatility tapering off, now might be a good time to buy in. Problem is, most of the established funds are closed to new investors. Some that are still open include Magnolia Fund, from J. C. Bradford (615 748-9000); 1991 Corn Fund, from Merrill Lynch (212 236-4166); and Wilson Fund, from Heinold Asset Management (312 993-4151).

Before you plunk down your capital, though, find out who's handling the money and how. The company that raises it typically hires investment managers. You can check their track records in the fund prospectus.

FAST TURNOVER. Also consider costs. Management fees run 6% to 20% of invested capital per year. Much of that covers brokerage commissions that result from the portfolio turnover needed to execute trading strategies.

Many funds now aim for 35% annual returns, not the overly ambitious 60% that often invited unreasonably risky trading in the 1980s. A few funds, such as Merrill Lynch's 1991 Soybean Fund, take on more risk by limiting themselves to specific sectors. More cautious funds invest substantial sums in Treasury securities to guarantee a minimum return to investors.

      Fund                          12-mo. total return
                                   Through March, 1991
      HARBINGER FUTURES LTD.                 76.3%
      VICEROY FUTURES LTD.                   63.3
      FUTURES FUND                           62.1
      WORLD CURRENCIES LTD.                  57.2
      CORNERSTONE FUND IV                    50.0
      FUND AVERAGE                            9.5
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