It’s been on the cards for a while.
Investors faced with a paucity of opportunities have been piling into passive commodity funds all year, and now the United States Natural Gas Fund has hit the limit of shares it can issue. From Bloomberg:
The fund applied with the U.S. Securities and Exchange Commission to register 1 billion new shares on June 5. The wait will temporarily halt the fund’s recent growth. Outstanding shares have increased to 281.4 million, more than eight times the level at the start of the year.
Concerns about the size of positions held by these passive funds has been growing since the beginning of this year (even Jim Cramer has joined in), and some fear their large positions are distorting the market. UNG held 18.7 per cent of the open interest in August contracts on Nymex yesterday, according to Bloomberg. As their popularity grows, the ETFs have had to increase their positions, as each share they issue is meant to reflect the underlying value of the asset.
But getting that permission won’t be easy:
The fund needs approval to issue new units from the CFTC, the Financial Industry Regulatory Authority and the National Futures Association as well as the SEC, according to John Hyland, the fund’s chief investment officer.
Given that the CFTC just came out yesterday with plans to review stricter controls on all commodities traders, including ETFs, they could be waiting for a while.
USO/UNG ETF managers ask CFTC for exemption on position limits (FT Alphaville, 19/06/09)
More weirdness in UNG (FT Alphaville, 16/06/09)