Senate Testimony of Michael W. Masters, hedge-fund manager. Food & energy speculation

[chill_wind]

May 20: "You have asked the question “Are Institutional Investors contributing to food and energy price inflation?”
And my unequivocal answer is “YES. (...) ”Institutional Investors are one of, if not the primary, factors affecting commodities
prices today."

Good morning and thank you, Mr. Chairman and Members of the Committee, for the
invitation to speak to you today. This is a topic that I care deeply about, and I
appreciate the chance to share what I have discovered.

I have been successfully managing a long-short equity hedge fund for over 12 years
and I have extensive contacts on Wall Street and within the hedge fund community. Itʼs
important that you know that I am not currently involved in trading the commodities
futures markets. I am not representing any corporate, financial, or lobby organizations. I
am speaking with you today as a concerned citizen whose professional background has
given me insight into a situation that I believe is negatively affecting the U.S. economy.
While some in my profession might be disappointed that I am presenting this testimony
to Congress, I feel that it is the right thing to do.

You have asked the question “Are Institutional Investors contributing to food and energy
price inflation?” And my unequivocal answer is “YES.” In this testimony I will explain
that Institutional Investors are one of, if not the primary, factors affecting commodities
prices today. Clearly, there are many factors that contribute to price determination in the
commodities markets; I am here to expose a fast-growing yet virtually unnoticed factor,
and one that presents a problem that can be expediently corrected through legislative
policy action.

Commodities prices have increased more in the aggregate over the last five years than
at any other time in U.S. history.1 We have seen commodity price spikes occur in the
past as a result of supply crises, such as during the 1973 Arab Oil Embargo. But today,
unlike previous episodes, supply is ample: there are no lines at the gas pump and there
is plenty of food on the shelves.

If supply is adequate - as has been shown by others who have testified before this
committee2 - and prices are still rising, then demand must be increasing. But how do
you explain a continuing increase in demand when commodity prices have doubled or
tripled in the last 5 years?

What we are experiencing is a demand shock coming from a new category of
participant in the commodities futures markets: Institutional Investors. Specifically,
these are Corporate and Government Pension Funds, Sovereign Wealth Funds,
University Endowments and other Institutional Investors. Collectively, these investors
now account on average for a larger share of outstanding commodities futures contracts
than any other market participant.3

These parties, who I call Index Speculators, allocate a portion of their portfolios to
“investments” in the commodities futures market, and behave very differently from the
traditional speculators that have always existed in this marketplace. I refer to them as
“Index” Speculators because of their investing strategy: they distribute their allocation of
dollars across the 25 key commodities futures according to the popular indices – the
Standard & Poors - Goldman Sachs Commodity Index and the Dow Jones - AIG
Commodity Index.4

I’d like to provide a little background on how this new category of “investors” came to
exist.

(...)

see full testimony: http://hsgac.senate.gov/public/_files/052008Masters.pdf