Remarkable surges in the commodities market have fund companies eager to get in on the action -- but between IRS warnings and Oppenheimer's closure of its Real Asset Fund, it appears their efforts have encountered tricky problems.

As reported by the MFWire, the Oppenheimer Real Asset Fund closed to new investments last week. According to a Wall Street Journal article, the immediate reason was difficulty in securing brokers for the fund's derivative investments, an issue that may effect several other firms in the process of transforming their commodity-linked funds to a set-up similar to Oppenheimer's.

When Oppenheimer launched it in 1997, the Real Asset Fund was the first mutual fund to offer small investors exposure to the commodities market. Oppenheimer pioneered this area through a strategy that involved complex derivative transactions with financial institutions. These transactions allowed the fund to track commodities markets through the GSCI -- and, crucially, to put investors' money in securities. Since IRS regulations require funds to have the bulk of their money in investments with "securities-related income," the ingenuity of the Real Asset Fund lay in its investing in the commodities market obliquely, without violating any rules about allocation.

Commodities funds launched later have been less successful in this regard. These funds cropped up as the value of various commodities -- such as copper, oil, and gold -- showed strong increases, and interest in commodities grew. The companies managing the new funds used their own strategies, different to Oppenheimer's -- and ultimately ran afoul of the IRS. In December 2005, tax officials ruled that Pimco's CommodityRealReturn Strategy Fund, along with similar, smaller funds offered by Rydex Investments and Potomac Funds, had underlying investments that did not satisfy the IRS definition of securities. The companies were given until the end of June 2006 to reorganize their portfolios to look more like Oppenheimer's.

But if Oppenheimer welcomed this vindication, it soon had other worries to deal with, in the form of the broker shortage. The Real Asset Fund has gained an average of 13% annually over the past five years, and 20% annually over the pat three years, according to the Journal. Assets climbed from $1.1 billion to $1.8 billion in the first three months of 2006, but this development only made it harder to negotiate its investments.

With $12.3 billion in assets, the Pimco commodities offering seems liable to encounter even greater difficulties. Portfolio manager John Brynjolfsson told the Journal that he foresees no hurdles, as did Dan O'Neill, president of Potomac Funds. But Jim King, director of portfolio management at Rydex, admitted that some "trepidation" surrounds the move.  

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