Placing Bets in a Volatile World

Futures funds thrive as stocks flounder

A weakening dollar, declining stock indexes, soaring food prices brought on by the U.S. drought. These trends help explain why investors who sought refuge from stocks in commodity futures funds made a smart move. The best of these funds, which bet on the future price of commodities or the direction of equity indexes, interest rates, and currencies, have returned 20% to 53% since the start of 2002. "They have been a great counter to my equity portfolio," says Stuart Sugarman, a 53-year-old Jackson Hole (Wyo.) psychiatrist whose stake in the Tucson Asset Management fund has risen 22% so far this year.

What's especially attractive about the futures funds is they can make money even if markets go down. As long as the direction of their bets is correct, the funds stand to gain. Most managers base their trading decisions not on broad economic factors but on complex mathematical formulas and algorithms in which prices have to move in one direction for a certain period of time. "This year, futures are doing well because currencies, interest rates, and stock indexes have all made large moves," says Sol Waksman, president at Barclay Trading Group, a research firm in Fairfield, Iowa. No wonder investors put $2.2 billion of new money into futures funds, sending their total assets to $42.5 billion--up from $38 billion at the end of the second quarter of 2001, according to Barclay.

The party might not be over. The drought lingering in some areas is supporting agricultural prices, and if the world economic recovery picks up, metals such as copper and aluminum will rally. Then there's oil. "The sword of Damocles is hanging over the world over whether or not we will invade Iraq, and oil prices could spike up further," says Willem Kooyker, chairman of Blenheim Capital Management in Somerset, N.J., whose fund is up 23% this year.

Among the hottest funds this year are Dunn Capital Management, which is up more than 50%. Daniel Dunn, who runs the firm from Stuart, Fla., profited on trades on Japan's Nikkei, Germany's DAX, and Britain's FTSE stock indexes, as well as on bond and eurodollar interest-rate futures offered on the Chicago exchanges.

Another big winner was John W. Henry & Co.'s dollar fund, which returned 50% through the end of August, mostly by betting the dollar would weaken against the euro and the yen. "We really caught the trend from April through July when the dollar kept losing ground against other currencies," says Mark Rzepczynski, chief investment officer at Henry in Boca Raton, Fla. Both Rzepczynski and Dunn hope to profit from movements in global currencies and stock indexes as uncertainty continues over Iraq.

The only catch: You typically need a minimum of $1 million to invest directly in these funds, which are structured as limited partnerships. Some, such as Dunn Capital Management, require $10 million. Two Web sites that track these funds are and

But smaller investors can buy into a fund of funds that divides its money among several futures funds that may vary by risk profile and type of investment. The cost of entry is as low as $5,000 ($2,000 for an individual retirement account), with fees that run about 1% of assets and up to 2.5% of profits. The top performers this year in this group are John W. Henry's Millburn series of funds, with a 29% return, and the Dean Witter Portfolio Strategy Fund, up 28%.

Volatility in world markets has crushed stocks. But as long as it's creating wide swings in commodities and key financial indicators, futures funds still have room to run.

By Pallavi Gogoi

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