Despite Controversy, Rogers Commodity TRAKRS Ready AT CME

November 05, 2005

Jim Rogers’ commodity index mutual funds are frozen in the Refco bankruptcy proceedings. But that’s not stopping the CME from launching its new Rogers Commodity TRAKRS. Nor should it.

It wasn't supposed to be like this.

When the Chicago Mercantile Exchange (CME) signed a deal to launch a bundled futures contract tied to the Rogers Raw Materials Index, it was supposed to be all gum-drops and roses.  After all, Jim Rogers is one of the biggest names in commodities investing, and commodities investing is hot.  Tie the two together in an easily tradable package and you should have a winner.

But then Refco imploded, and it dragged Rogers' name down with it. Two funds tied to the Rogers' index have had their assets frozen in the Refco bankruptcy, and investors can't withdraw money. Suddenly Rogers, one of the world's legendary investors, has seen his name tied to words like scandal and bankruptcy.

In a sense, it shouldn't matter.  The new CME TRAKRS are not tied to Refco or the frozen mutual funds in any way. Period.  They're simply tied to the Rogers index, which remains one of the premier commodity indexes on the market today.

And the CME isn't letting the scandal get in the way.  The exchange is moving forward with the launch on Friday, November 4, and still harbors hope for the product.  As well they should.

But it remains to be seen if the scandal will tarnish the new TRAKRS by association.

With all this going on, it felt like a good time to review the situation - to take a look at who Jim Rogers is, what's the deal with his index, and what happened at Refco.  And what are these TRAKRS, anyway?

Legendary Investor

Rogers is one of the brand-name investing legends of recent years.  He's not in the Warren Buffet and Benjamin Graham category, but he's not far behind.  He co-founded the legendary Quantum Fund with George Soros, which famously posted 30 percent returns per year for more than 30 years.  Rogers "retired" at age 37.

With his money made, Rogers set out on a series of trips around the world. Those trips convinced him that we were on the verge of a massive bull market in commodities, as a global lack of investment in commodities infrastructure ran head-long into a rapidly developing world.  He launched the Rogers Raw Materials Index to track that boom, and created a mutual fund tied to the index to capture the return.  He wrote a book titled Hot Commodities which predicted a 15-20 year bull market in commodities, and so far, it looks like he was right. 

A Global Commodities Index

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 diverse exposure is directly tied to Rogers' experience traveling the world.

"The breaking point came when I realized that none of these indexes included rice, despite the fact that two-thirds of the people on earth eat rice every day," Rogers said. 

Rogers wanted his index to track the true global demand for commodities - not just the demand generated by the West.  This diverse exposure, and Rogers' large personality, helped attract attention to two mutual funds tied to his indexes, ultimately driving assets under management up towards $500 million.

Refco Goes Poof!

Things were going well for the Rogers funds until mid-October. That's when Refco, at the time the world's largest independent futures broker, unraveled.  The company disclosed that CEO Philip Bennett had covered up $430 million in bad debt owed to the company, and a classic confidence crisis and run on the bank occurred.  Customers withdrew money in droves, and Refco could find new loans to maintain liquidity.  The company filed for bankruptcy two weeks later. 

The Rogers funds had over $360 million in assets at Refco at the time, and those funds were frozen in the bankruptcy filing. All of a sudden, Rogers' shareholders couldn't access their money.

It's hard to get to the bottom of exactly what happened at Refco. It appears as though the bad loan to Bennett was made to cover up non-performing loans from Refco itself. According to Bloomberg, Refco made a series of bad investments between 1998-2003, including loans to a Malaysian conglomerate that operated betting pools at a horseracing track ().  Rather than recognize those loans as non-performing, which would have impacted Refco's credit and reputation, Bennett shifted them to a separate entity and personally guaranteed that they would be paid back.  That put Bennett on the hook, rather than Refco, and made Refco's balance sheet look clean as a whistle.  All of which helped Refco pull off its successful initial public offering in August of 2005, when the company raised over $500 million - and made Bennett enormously rich.

But the walls came tumbling down when Bennett's bad loans were revealed in mid-October. Bennett repaid the loans - but only by using Refco's credit.  Bennett secured a $418 million loan from the Austrian bank Fuer Arbeit und Wirschaft AG - money that the bank says is now owed by Refco, making the Austrian bank the largest creditor in the bankruptcy proceedings.

Funds Frozen - And Who's To Blame?

Until October, the Rogers funds weren't affiliated with Refco. The money was held at Man Financial Group, an enormous UK-based futures broker.  But this spring, Beeland Management - which manages the Rogers funds, and is largely owed by Rogers himself (Beeland is Rogers' middle name) - began talking with Refco about becoming a marketing partner for the fund.  In many ways, it made sense: Refco was the largest futures brokerage in the U.S., and the Rogers funds invested mostly in futures.  Refco could tap into its customer base and drive assets to the funds.

According to, "the ongoing talks led to a deal which Rogers' Beeland Management Co. transferred $362 million in assets in the two funds from Man Financial to Refco in late September."

The quid pro quo was that, by October, Refco was the official marketing agent for the funds, and was in discussions with the group about becoming the prime broker.  Refco even discussed buying a minority stake in Beeland.

And then the trouble started. When news of the bad loans surfaced, Beeland managers urgently emailed Refco to make sure that the funds were held in the regulated Refco LLC - rather than the unregulated Refco Capital Markets.  The location of the funds seems like a technicality, but it makes all the difference: Funds in Refco LLC are not part of Refco's general assets, and not subject to any bankruptcy proceedings.  Indeed, Refco LLC is not bankrupt - and is still operating as a regulated futures broker.

According to some excellent reporting from USA Today, Rogers' group says it repeatedly sought - and received - assurances from Refco that the funds were deposited with Refco LLC.  And according to Rogers' legal complaint, Refco executives assured Rogers' company that the funds were deposited in the regulated account.

But later, Refco swept the funds out of Refco LLC and into the unregulated Refco Capital Markets.  Rogers' group said it tried to get the funds transferred back, but Refco demanded the request in writing. By the time the fax got there, the assets were frozen.

Refco, of course, vehemently disagrees.  According to Refco, the Rogers funds "authorized the transfer of certain assets into their new accounts at Refco CM [Capital Markets] and did so with their eyes wide open."

The bankrupt futures company came out swinging in its filing, saying that the Rogers Funds are "acting deceitfully by making knowingly false allegations in this litigation and seek to be unjustly enriched by trying to deprive Refco CM's estate of substantial assets that properly should be available for the benefit of all Refco CM creditors."

It's impossible to know, right now, who's right and who's wrong.  It's a little hard to imagine the Rogers group specifically authorizing the transfer, since it's unclear what they stood to gain from having the funds wired to the unregulated outfit. And it's easy to see Refco trying to shore up its business with an influx of new capital. After all, this was a crisis of confidence - if Refco had weathered the initial stampede, there's a good chance the firm could have survived.

On the other hand, the relationship between the two groups was clearly quite intimate - and involved.  The fact that everything came to a head in a period of two months is unusual.

Still, this is a matter for the courts to decide, and it will play out in bankruptcy proceedings over the coming days and months.

Trading TRAKRS

All of which brings us to the TRAKRS, the new bundled futures product tied to the Rogers Raw Materials Index, which debut on the CME on Friday, November 4.

In many ways, none of the above should matter.  The TRAKRS are not in any way tied to the Rogers mutual funds, and the fact that the funds are frozen has no bearing on the Rogers' Raw Material Index - which remains one of the most interesting and diversified commodity indexes on the market today.

But much of the cache tied to the Rogers index was tied up in Jim Rogers himself - the large personality, the tremendous record of investing.  With the unfortunate situation at Refco, Rogers' name is - rightfully or not - tied up with negative associations.

Still, the TRAKRS do provide an interesting way to invest in commodities, and an improvement - in many ways - over the now seized mutual funds.  After all, one of the chief criticisms of the Rogers' mutual funds has always been that they were woefully expensive: They came with a $10,000 investment minimum with a six percent load, and an annual fee of 1.85 percent.

The TRAKRS do away with the investment minimum, and the load.

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.


Investors still don't have the perfect way to access the commodities market.  The existing commodities mutual funds all feature high expenses, and the TRAKRS come with their own problems - like all futures contracts, they have a fixed expiration date, forcing investors to roll over the product to maintain exposure.  The holy grail is a commodities ETF that offers exchange-tradable exposure to a diversified commodities index at a reasonable cost.  There are a few groups working on the proposal, including iShares and Deutsche Bank proposals in registration at the SEC, but nothing is immediately pending.

In that environment, these new TRAKRS offer an interesting opportunity for some investors.  And despite the current negatives surrounding the Rogers name, they track an excellent index provided solid, diversified exposure to the commodities market.


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