Rogers, Refco and TRAKRS

10Nov05

The saga of Jim Rogers’ fight with Refco over the status of certain investments of his commodity index funds gets front page coverage from Peter A. McKay and the Wall Street Journal .

Rogers has become a high profile investment figure due in part to his touting the benefits of (unlevered) commodities investment.

In his 2004 book “Hot Commodities,” Mr. Rogers not only explained why he thought supply and demand would push natural-resource prices higher for more than a decade to come, but also decreed that the reason commodities had gotten a rap as a prohibitively risky investment was because most people, even on Wall Street, don’t understand how to use futures contracts, the primary vehicle for placing commodity bets.

Mr. Rogers posited that this risk could easily be avoided if an investor used exchange-traded futures and simply chose to put up 100% of the contracts’ value, even if the market rules didn’t require that. In its regulatory filings on behalf of the Rogers funds, Beeland Management seemed to spell out just such a cautious strategy. In particular, Beeland filed a revised prospectus for the public Rogers International Raw Materials Fund this fall, around the time it switched to using Refco as its primary futures broker.

While the facts of the case are murky and the topic a bit arcane, the bottom line is simple:

His (Rogers) legal tussle with Refco comes down to this: If the brokerage didn’t follow instructions from the managers of Mr. Rogers’s two funds, Refco may have violated federal commodity-trading rules protecting customers. If, on the other hand, Refco did the managers’ bidding, then the funds may not have been adhering to their namesake’s much-publicized musings.

Unfortunately for investors this has put Rogers’ funds into a legal limbo. Despite this controversy another product linked to the Rogers Raw Materials Index has just launched. The Chicago Mercantile Exchange (CME) has just launched a bundled futures product (TRAKRS) that is designed to match the returns of the index.

Matthew Hougan at IndexUniverse.com investigates the Rogers/Refco case and notes that even before the Refco debacle the Rogers index had already received a fair amount of attention.

The Rogers Raw Materials Index attracted quite a bit of attention because, by some measures, it was the best commodity index in the world. As examined here, the Rogers index offers more diversified exposure to the global commodities market than competing indexes. It covers 35 different commodities, by far the largest number, and has a relatively low weighting of energy; many of the competing indexes, such as the Goldman Sachs Commodity Index, are dominated by energy exposure.

The new TRAKRS product is in no way affected by the Refco case. However the attraction of the product was tied up with Rogers himself. Hougan notes that TRAKRS are a novel product that could solve an ongoing problem for investors.

For those not familiar with the TRAKRS, they’re a neat little product from the CME. Essentially, they are index futures contracts – with a twist. That twist is that, unlike traditional index futures, people who purchase TRAKRS post all of the value of the TRAKR up-front; with most futures contracts, all that’s required is a ten or twenty percent margin deposit. Because the positions are not leveraged, the regulators make it easier for people to buy TRAKRS – the share may be held in a traditional brokerage accounts, rather than at futures-specific brokerages. That means that people daunted by the idea of opening up a futures trading account can still access the TRAKRS.

The TRAKRS don’t charge a load, but they do charge 1.95 percent per year to manage the contract. Still, compared to a six percent load, the products may be a bargain. And with their interesting value proposition, the TRAKRS should find some traction with investors looking for a low-priced alternative to the expensive commodity index funds

The bottom line problem for many investors is that obtaining quality commodity exposure has been difficult to date. The TRAKRS product is an attempt to make commodity exposure more available to individual investors. The question is whether the Refco connection will scare off investors and eventually doom an otherwise viable product.