Jun. 15 – Following the growing trend of launching third-generation commodity indices – also known as “active” or “dynamic” indices - Goldman Sachs, the American investment bank with the largest commodity division by revenues, has started marketing for its newest commodity index which will be launched with Clive Capital, the largest commodities hedge fund, a report in the Financial Times says. The coming index will track 19 raw materials including crude oil, gold, wheat, sugar and live cattle, and take the components of the Dow Jones-UBS benchmark as its starting point. Without completely straying from the components of the benchmark, Clive Capital will review and adjust the holdings of each commodity in the index every month, to minimize the risks brought by an index’s static exposure to individual commodities over time. The new-generation index appeared along the divergence in performance of distinct commodities. Unlike the general upward trend of commodities shown between 2009 and 2010, this year’s market has become more complicated. While Brent crude oil, robusta coffee and silver have gone up by more than 15 percent so far, prices of raw sugar, nickel and cocoa have dropped sharply. The mixed performance of commodities has increased the risks of tracking traditional indices, such as the first-generation indices S&P GSCI and the Dow Jones-UBS, which just simply hold a diverse basket of commodities. What is more, since these indices trade out of expiring contracts in a futures market pattern, they can lose value if new contracts cost more. Although the second-generation indices, or the “enhanced indices,” worked on reducing the costs of maintaining an index strategy by holding contracts at more favorable points of the future curve, they may have not effectively diminished the risks brought by unequal commodity performances in their baskets over time. Commodities going their separate ways have inspired investment banks to launch the third-generation indices that are more “active” and “dynamic.” In addition to Goldman Sachs and Clive Capital’s plan on the new index, other investment banks have also launched similar products. Barclays Capital recently launched an index with allocations based on its analysts’ opinions, Credit Suisse offers one now with commodity holdings determined by Glencore traders, and UBS currently provides similar products together with Merrill Lynch. Other banks are also working on their own versions of indices. For instance, Macquarie is preparing an index guided by the views of its own research team, according to the FT report. Bankers have started to see a trend among investors to turn away from “enhanced” indices to more active investment. Kevin Norrish, senior commodities analyst at Barclays Capital, estimates the capital that tracks the “dynamic” commodity indices to reach US$20 billion to US$25 billion. The estimation of Edmund Carroll, co-head of commodity index trading at UBS, is even bolder, correcting Norrish’s estimated capital size up to US$40 billion to US$60 billion. Although both figures are still small compared to the total investment scale of over US$450 billion into the commodities market, the share of investment tracking the emerging indices is rapidly growing. While the third-generation indices market themselves as ones that can help investors reduce loss on contango and risk of volatile commodities prices, it is not clear so far if these emerging indices will definitely reward investors better. The Credit Suisse index has only returned less than 1 percent for the year so far, compared to the 1.5 percent-return from the traditional Dow Jones UBS.

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