Commodities and Derivatives: Demand rises as futures come of age

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The Independent Online
HARDLY a month goes by without a bank somewhere in Europe launching a futures fund. As a result, this embryonic business is losing its cowboy image and gaining respectability.

The banks would have us believe the rapid multiplication in the number of funds is a reaction to client demand, but they are certainly working hard at creating interest.

This comes mainly from prosperous private investors who buy in tranches of up to dollars 1m ( pounds 645,000; but the language of this market is dollars not sterling), though it is possible to invest as small a sum as dollars 1,000 in some funds. There is also increasing interest from institutions.

So why does the client want this product? Every banker gives the same primary reason: investors disillusioned with low-yielding deposit accounts are looking for higher returns elsewhere.

Chief among the banks involved are the US institutions in London and the French, German, Swiss and Nordic banks. Names include Lehman Brothers, Citibank, Hypo Bank, Banque Indosuez, Credit Agricole and Swiss Bank Corporation.

Didier Varlet, chief executive officer of Carr Asset Management, the Chicago-based futures management subsidiary of Banque Indosuez, adds that now futures and options have been around for some years, investors are getting more comfortable with them. He also thinks they are in demand because of their lack of correlation with other markets.

Alan Brody, a director of managed product at Lehman Brothers, agrees with all these reasons but also says that many investors are concerned about the height of the stock and bond markets, fearing corrections, and are buying futures funds as an alternative.

The first companies to market these funds in Europe were ED & F Mann and Rudolf Wolff & Co in the 1980s. Their schemes tended to be 'guaranteed' funds that guaranteed your money back after, say, five years and also held out a good chance of capital gains.

They were mainly marketed in offshore financial centres because of prohibitive regulations in most European countries.

But times have changed and it is now possible to market futures funds in most countries. British regulations allow vehicles called futures and options funds (FOFs) and geared futures and options funds (GFOFs), although the only ones to have caught on so far have been those that track the stock market indexes.

Indeed, of all the banks in Europe, the British ones are noticeably absent from the list of institutions that do market futures funds.

Among the banks that do, the nature of the funds is changing. Most banks do not actually carry out the investment management themselves. Instead, they pick a handful of commodity trading advisers (CTAs) from around the world and make each of them responsible for a segment of the portfolio. The banks monitor risk and handle administration.

Mr Varlet has CTAs who manage with a variety of techniques: following market trends; using arbitrage; and just making good old-fashioned fundamental judgements. He has a range of advisers for each of his Maxima and Indosuez Currencies funds. In total he has about dollars 450m under management.

While futures funds may have no correlation with the stock and bond markets, they do have bad periods. Mr Varlet gives the example of currency funds: he says that 1992 was a very good year, but last year was disappointing.

'In 1993 the trends were less interesting in the major currencies - with the exception of the yen - than the other years,' he says. The truth is that many CTAs need strong and sustained trends if they are to perform.

Mr Brody tackles this by using different types of traders in Lehman Brothers' Advisors Portfolio. 'We feel very strongly that we should be using a mixture of trading styles within this fund,' he says. 'I like to have a range of CTAs and non-correlated trading styles, the net effect of which is to reduce volatility,' he says.

But although all these approaches are said to be demand- driven, there is another carrot for banks quite apart from trading manager fees of 1 per cent. Nicola Meaden, managing director of TASS Management, the London- based futures performance measurement specialist, says some banks are getting involved partly to attract business to their foreign exchange desks. The deal is this: if a bank scratches a CTA's back by employing him to manage money, he scratches the bank's back by putting all his foreign exchange business through its dealing desks.

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