Indices' battle against "contango"

......the money flooding in to commodities through mainly index trades has had a troubling effect on the performance of those indices, meaning banks have been forced to plough resources into developing new kinds of commodities bets to continue attracting investors.

More than $150bn has flowed into commodity markets over the past five years, mostly commodity indices, which reflect the prices of a basket of commodities that mainly include oil, gas, gold, copper, sugar and grains, much in the way the FTSE 100 reflects the share prices on the top 100 companies listed in London.

An attraction for investors in indices, beyond the rising prices of commodities, is the ability to earn a separate return, known as the roll yield, from futures prices being lower than the prevailing spot, or current, price. Investors tend to roll their index trade over each month, just ahead of expiry of the contract.

Traditionally, this trade has been profitable with investors selling at a higher price and buying at a lower price on the roll. But the roll yield has disappeared as the flood of money from index funds entering the markets and the structural demand issues in certain markets, such as oil, have pushed prices up across the board, and in many cases made futures prices higher than the spot price. Some indices have ended up performing worse than the underlying commodities......

http://www.ft.com/cms/s/f0e23996-41c0-11db-b4ab-0000779e2340.html