Geneva, London, 13 May 2011: Reuters

Passive, long-only commodities investment as a shelter from extreme volatility on futures markets has found new popularity, an executive director at Dow Jones Indexes told Reuters.

Two days of frantic selling last week knocked around 10 percent off the price of oil, the biggest commodities market, and volatility has remained high.

Selling across the broader asset class drove the Reuters Jefferies CRB index down around 9 percent over the course of last week, its steepest fall since 2008, and some funds with aggressive, active strategies were said to have suffered big losses.

Financial outflows were relatively modest from the commodity indexes, which give exposure to a variety of raw materials, even while they lost value. DJ-UBS dropped over 9 percent last week.

DJ Indexes Executive Director Jamie Farmer could not yet disclose the inflow or outflow figures from funds that track the index following the sell-off, but said so far this year passive investment had increased and that he expected the trend to remain intact.

"We continue to see an increasing interest in passive investment as evidenced by the DJ-UBS Commodity gaining in popularity -- the assets under management rose to $76.9 billion as of Q1 2011, up 24 percent from the $62 billion at the end of last year," he said in an interview this week.

The DJ-UBS index brings together 19 commodities, of which no single raw material or group or materials, can represent more than 33 percent.

"We have seen an increasing interest in passive commodity investments globally," Farmer said further. "We are recognising a recent appetite for such investments from more advanced economies like South Korea."

Institutional investors, such as pension funds, began increasing their commodity exposure from around the start of this century, with proponents advocating that up to 5 percent of an investment portfolio should be made up of raw materials, in part as an inflation hedge.

PASSIVE TO ACTIVE AND BACK AGAIN?

In the past few years, a persistent contango in oil and other commodities spurred many players into active strategies, involving both long and short positions and away from long-only index exposure when players tend to lock in and take a long view.

Contango -- whereby prompt contracts are cheaper than those for later delivery -- wipes out the return that passive index investment can deliver from rolling positions from one contract to another in a market in the opposite state of backwardation.

Farmer said contango was still a concern, but it had not deterred new investors globally. In particular, he cited the emerging economies such as South Korea, which are beginning to turn their attention to pension provision.

Some of the increase in assets under management was represented by an increase in commodity values, but that did not account for all of the rise, Farmer said.

The diversification of the index helps smooth out some volatility.

For comparison, the first-quarter increase in the price of U.S. crude was around 17 percent, less than the 24 percent increase in the DJ-UBS assets under management.

So far, it has favoured U.S. crude but has said it would consider including Brent -- which in contrast to U.S. crude is in narrow backwardation -- in its basket of commodities next year following the rise of the European benchmark since late last year.

Brent rose by 24 percent in the first quarter and has continued to outperform U.S. crude.

A more debatable advantage of Brent is that it might be a shelter from threatened U.S.-led regulatory changes, which Farmer said had left the industry in "a holding pattern".

"Non-U.S. contracts may offer an alternative, but there is also a sense that non-U.S. jurisdictions could mirror whatever the U.S. puts in place," Farmer said.

Ends --

By Barbara Lewis and Nigel Hunt, Reuters - for Commodities Now