Indexes R us

For all those money managers who have complained that there's no strong commodity index for hedging risk or diversifying a heavily stock-- weighted portfolio, take note. Recently both the New York Board of Trade (Nybot) and the Chicago Board of Trade (CBOT) announced the formation of new commodity

In October, Nybot will start trading Standard & Poors' S&P Commodity Index (SPCI), an index of 17 actively traded commodities across six sectors. In the fourth quarter, the CBOT will begin trading the Dow Jones-AIG Commodity Index (DJ-AIGCI), an index of as many as 23 futures markets across six sectors. The CBOT's index was developed by Dow Jones Indexes and AIG Trading.

Institutional traders and hedge funds are the initial targets of the new indexes, though representatives of each exchange say they will target commodity trading advisors (CTA) as well. Both Nybot and the CBOT claim their indexes have superior weighting methodologies to ensure the indexes have greater balance across market sectors.

Among the features that distinguish the SPCI, according to S&P Managing Director Bob Shakotko, is its geometric methodology for weighting, which is the method used with the PPI and CPI inflation indexes. This weighting is used to reduce investor risk when commodities spike. Double counting also is minimized.

"Any index that includes multiple commodities risks having commodities counted twice," says Shakotko. The SPCI adjusts downward the weight of commodities that have byproducts also in the index.

The DJ-AIGCI avoids over-weighting by limiting each commodity to 15% of the index and each sector to 33% of the index and does not include a commodity if it falls below 0.5%.

Institutional investors already are trading OTC swaps based on the DJ-AIGCI, which will create arbitrage opportunities, according to CBOT Managing Director for Product Development David Lehman.

"This product was demanded by institutional investors trading OTC products benchmarked to the index," Lehman says.

The SPCI will trade in the Nybot open outcry pits while the DJ-AIGCI will trade exclusively on the CBOT and Eurex's a/c/e platform.

The Nybot also will begin trading the Commercial Markets Index (CMD, an index of 25 of the most liquid U.S. futures markets, this fall. The CMI previously was known as the Barclay Futures Index. The index is expected to replicate a trend-following futures program.

"The only asset class that offers investors true diversification are commodities," says Mark Fichtel, Nybot president and CEO.

By Daniel P. Coffins