This has been bugging me

Colleges & Universities University of Michigan
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<p>and I know that there are many knowledgeable posters here who might be able to help me out. This is a question at work that I dont want to ask around here because it might be a very dumb question.</p>

<p>So one of the biggest thing the sales desk do is to cater for institutional investors (Mega funds). They either help them invest in a certain index for a fee (RICI, GSCI, DJUBS etc) or they custom make an index based on their needs (say they make an index of Gold, Copper and Aluminum (if someone’s interested in only those metals), then they actually buy the underlying commodities on the other side to hedge their position. Boo hoo everyone knows that. </p>

<p>One thing I still haven’t figured out is why sometimes, we make a single commodity index for a fund. I get it why funds would want an index for a basket of commodities…mainly because they dont want to deal with contract expiration (rolling) and want the exposure… It makes sense because it is hard to keep track of say 26 different expirations or roll 26 contracts in different commodities. But what’s the point in paying a fee for a single commodity index?</p>

<p>Few possibilities came to mind but they all dont make sense:</p>

<p>1) same old rolling/contract expiration
but even a monkey can sell the current contracts and roll to the next month if it involves only one commodity… it doesnt make sense to pay a huge fee just to get someone to do it for you</p>

<p>2) exposure for index
There’s no additional exposure if your index only consist of one component</p>

<p>3) Taking delivery
See rolling</p>

<p>4) Regulations?
If banks can invest in single commodities, funds can lol…there are less regulations for funds than banks.</p>

<p>5) Client contract specifically say no futures and only index?
Then if I were the client I would be really really freaking ****sed off if you do this to work around the system.</p>

<p>I dont want to ask around because this might be a dumb question… Can anyone help me?</p>

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<p>by the way I know this is not the right forum I just think there are some knowledgable posters here who might know</p>

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<p><a href=“Bank of America Error Page”>Bank of America Error Page;

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<p>that doesnt explain it though
“without having to deal with the cumbersome mechanics of trading, rolling and managing futures contracts on an exchange.”</p>

<p>It doesn’t take that much to roll one index compared to the fee they pay. I already know that.</p>

<p>“guarantee execution at official closing prices when orders are received prior to specific cut-off times in the morning”</p>

<p>If your broker cant do that you should fire them.</p>

<p>By the way I’ve seen this document. The desk here published it. There’s a newer version by the way. The advantage they listed there are mainly for sub-sector (more exposure) and index swaps… there really isn’t an advantage listed for true single commodity index (besides the fact that you pay a hefty fee to ML :smiley: ). We are talking about a corn index that consist only of corn. Why dont I just trade corn futures/options, and roll it every month, as opposed to pay an index fee and have someone do it for you?</p>