Commodity investments could near half a trillion dollars by the end of 2011 as the return of $100 oil and a broad-based rally heighten interest in the asset class to levels not seen since 2008.
But the wave of money now hitting commodities is more sophisticated and discerning than its predecessor three years ago. Investors are increasingly looking for active management rather than 'buy-and-hold' plays, which left many counting their losses after the financial crisis hit.
Barclays Capital data and estimates suggest that, if prices remain as they are, total fund investments in commodities at the end of 2011 are likely to be around $420 billion. With any price appreciation, the total would be higher.
Barcap estimated that 2010 ended at a record high of about $360 billion invested in commodities by funds - a year-on-year increase of around $90 billion. Of that, about $60 billion was down to flows and the rest due to price rises.
"The overall environment remains positive, but we would expect to see a slowdown in momentum slightly as commodity prices have increased a fair bit over the course of last year," said Amrita Sen, a commodities analyst at the bank.
"In terms of 2011 lower than or around $60 billion in new inflows perhaps, but a robust number nonetheless."
Analysts now say half a trillion is within reach as big investors are still keen to allocate funds to the sector.
Asset managers and pension fund consultants confirm they have seen a rise in enquiries and in fund flows.
"We do see a substantial part of our clients both on the private banking and institutional side increasing their allocation to commodities, and we are expecting more fund flows this year from institutions," said Bas Peeters, head of structured investment strategies at ING IM, one of the world's largest wealth managers.
Simon Fox, principal of the alternatives boutique at pension fund consultants Mercer, paints a similar picture.
"We have done over 20 commodity future searches (in 2010) and 10 have been in the active space - either for commodity fund of hedge funds or long/short commodity managers," he said.
Active indexes largely outperformed the standard industry benchmarks in 2010. The Summerhaven Dynamic Commodity Index and the Credit Suisse Glencore Active Index Strategy both returned more than 20 percent.
The S&P GSCI, meanwhile, returned just 9 percent, and the Dow-Jones UBS Commodity Index 16.8 percent.
Colin O'Shea, head of commodities at Hermes Fund Managers in London, which manages over $1.7 billion in commodities, said UK investors were still under-invested in commodities.
"We have a pretty solid pipeline of new business and we're talking to investors in the UK, Europe, the US and Asia."
The return of $100 per barrel crude oil and strong commodity prices last year have piqued interest from investors, Jason Schenker, head of Prestige Economics in Texas, said.
"But everything to do with commodities is going to get more attention in 2011," Schenker said.
"Investors will be looking at everything from active indices and funds to old-fashioned naked speculation. The longer-term trend is higher, and that's stoking interest across the board."
Fund managers say there has been growing interest in enhanced indexes and active strategies due to the disappointing performance of passive investing in recent years.
Huge gains in commodities in the first seven months of 2008 turned into huge losses as markets crashed. Then during the recovery, returns were well below spot price increases due to the structure of the market.
Mercer's Fox said the shift to active strategies was well underway last year and is likely to continue through 2011. He is now starting to see more interest in timberland and agriculture.
"These give you some exposure to commodity prices but also a return on capital from financing the production of the commodities, and I think that's where we will see more searches in 2011," Fox said.
According to Sabine Schels, commodity strategist at Merrill Lynch Bank of America, "The big drivers last year were precious metals and agriculture. We think this year we will move towards more cyclical commodities sectors like energy and base metals."
Alex Moiseev, chief investment officer at Dighton Capital Management, a managed futures investment manager in Switzerland running around $230 million in assets, said he expected established investors to increase their allocations to precious metals this year.
"For the big insurance companies and pension funds it will become a mandatory asset class to hold. I also see an increased allocation to agriculture, and possibly energy," Moiseev said.
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