Investors' Growing Appetite for Oil Evades Market Limits

This explains most of the price runup since 2000. Oil should be in the range of $50/barrel.

The whole “speculators did it” theory is a crock (or barrel of something).

Where are these hedge funds storing all the oil?

No where, of course. They’re buying (and selling) futures contracts. If they buy a contract, they have to sell it before the closing date — or take delivery of the oil.

This is the story of our times. All the rest - McClellans' revelations, the Michelle Obama tape, gay marriage, abortion, evolution, etc. - are just caffeine substitutes.

Bidding the prices up so someone else can pay.

The federal agency that oversees oil trading, the Commodity Futures Trading Commission, has exempted these firms from rules that limit speculative buying, a prerogative traditionally reserved for airlines and trucking companies that need to lock in future fuel costs.

The rules are there for a reason, enforce them.

You're absolutely right. Speculators are not storing oil, they're buying in anticipation of more or less immediate price rises.

It's true that this causes prices to rise faster than they otherwise would, and that there will be corrections which result in loses for some, but the basic drivers are vastly increased demand, peak oil or at least inability of supply to keep up, and the drop in the dollar.

The pols are trying to blame anyone and everyone for their steadfast refusal to allow us to drill our own oil.

So long as oil goes up, you just sell your oil contract for a profit above what you paid, but less then the market price is.

Even if oil goes down, you don't have to take physical possession. Say you buy oil at $100. Say thirty days out when this imaginary contract is to be executed, oil is $90. Someone, somewhere will buy it for $85. You'll lose $15, but that happens with stocks, houses, horses, companies.

Where are these hedge funds storing all the oil? No where, of course. They’re buying (and selling) futures contracts. If they buy a contract, they have to sell it before the closing date — or take delivery of the oil.

And it's nice to have someone commenting in this thread who actually knows a little something about commodities trading. I work for a company that does commodities trading (we're into agriculture commodities, though). Having gained a simple understanding of commodities trading, I now know that this whole speculators did it thing is, as you say, a barrel of something that smells.

What's really interesting is that the LSM and the public have no clue that it only takes 3-4 off shore hedge fund managers to agree ahead of time what price to sell those futures between themselves.

Do this with a few hundred million over and over and the price continues to up and profits are made on the books.

Then at a predetermined point agreed upon by participating managers....those contracts are dumped to someone else with a small loss of very small gain.

Then short the commodity and never physically posses one barrel of oil or one gallon of wholesale gasoline.

Since OTC contracts aren't monitored (who and how much) the commodities market is open for exploitation like we are seeing.

Do not think that OPEC and Asian countries aren't playing in this sandbox too.

Having gained a simple understanding of commodities trading, I now know that this whole speculators did it thing is, as you say, a barrel of something that smells.

Google Amaranth natural gas 2006 and get back to me. This was done before in the natural gas markets.

They’re buying (and selling) futures contracts. If they buy a contract, they have to sell it before the closing date — or take delivery of the oil.

Nonsense. As the futures contract they've bought nears expiration, they simply sell their position back into the mkt and repo the same position (or a larger one) in a contract month further away.

Any other fantasies?

The whole “speculators did it” theory is a crock (or barrel of something).

Today's oil prices are driven by speculation and market manipulation by Wall Street and energy traders. A Senate investigation revealed this in 2006, finding that prices above $50/barrel could not be accounted for by market forces. Download the full report (and prepare to get mad). The Role Of Market Speculation In Rising Oil And Gas Prices: A Need To Put The Cop Back On The Beat

The Enron loophole (yes, the same crooks who pushed Clinton and Gore on Kyoto and discussed how much money could be made trading "carbon credits") made it possible for market manipulation. The CFTC is supposed to regulate commodities trading, but exempted OTC trades. Recently, the CFTC announced they were going to apply greater scrutiny to ICE, but the CFTC seems largely clueless (see below). At best the CFTC is undermanned and overwhelmed.

Following are exerpts from the report...

The traditional forces of supply and demand cannot fully account for these increases. While global demand for oil has been increasing – led by the rapid industrialization of China, growth in India, and a continued increase in appetite for refined petroleum products, particularly gasoline, in the United States – global oil supplies have increased by an even greater amount. As a result, global inventories have increased as well. Today, U.S. oil inventories are at an eight year high, and OECD oil inventories are at a 20-year high. Accordingly, factors other than basic supply and demand must be examined…

Over the past few years, large financial institutions, hedge funds, pension funds, and other investment funds have been pouring billions of dollars into the energy commodities markets – perhaps as much as $60 billion in the regulated U.S. oil futures market alone – to try to take advantage of price changes or to hedge against them. Because much of this additional investment has come from financial institutions and investment funds that do not use the commodity as part of their business, it is defined as “speculation” by the Commodity Futures Trading Commission (CFTC).

According to the CFTC, a speculator “does not produce or use the commodity, but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes.” Reports indicate that, in the past couple of years, some speculators have made tens and perhaps hundreds of millions of dollars in profits trading in energy commodities. This speculative trading has occurred both on the regulated New York Mercantile Exchange (NYMEX) and on the over-the-counter (OTC) markets.

The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil to be delivered in the future in the same manner that additional demand for the immediate delivery of a physical barrel of oil drives up the price on the spot market. As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum.

Although it is difficult to quantify the effect of speculation on prices, there is substantial evidence that the large amount of speculation in the current market has significantly increased prices. Several analysts have estimated that speculative purchases of oil futures have added as much as $20-$25 per barrel to the current price of crude oil, thereby pushing up the price of oil from $50 to approximately $70 per barrel. Additionally, by purchasing large numbers of futures contracts, and thereby pushing up futures prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $70 per barrel, if the futures price is even higher.

As a result, over the past two years crude oil inventories have been steadily growing, resulting in U.S. crude oil inventories that are now higher than at any time in the previous eight years. The last time crude oil inventories were this high, in May 1998 – at about 347 million barrels – the price of crude oil was about $15 per barrel. By contrast, the price of crude oil is now about $70 per barrel. The large influx of speculative investment into oil futures has led to a situation where we have high crude oil prices despite high levels of oil in inventory.

[snip]

At the same time that there has been a huge influx of speculative dollars in energy commodities, the CFTC’s ability to monitor the nature, extent, and effect of this speculation has been diminishing. Most significantly, there has been an explosion of trading of U.S. energy commodities on exchanges that are not regulated by the CFTC. Available data on the nature and extent of this speculation is limited, so it is not possible for anyone, including the CFTC, to make a final determination about the current level of speculation.

[snip]

Until recently, U.S. energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud.

In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC electronic markets. Because of their similarity to futures contracts they are often called “futures lookalikes.” The only practical difference between futures look-alike contracts and futures contracts is that the look-alikes are traded in unregulated markets whereas futures are traded on regulated exchanges. The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.

The impact on market oversight has been substantial. NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports, together with daily trading data providing price and volume information, are the CFTC’s primary tools to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. CFTC Chairman Reuben Jeffrey recently stated: “The Commission’s Large Trader information system is one of the cornerstones of our surveillance program and enables detection of concentrated and coordinated positions that might be used by one or more traders to attempt manipulation.”

In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts (“open interest”) at the end of each day.

The CFTC’s ability to monitor the U.S. energy commodity markets was further eroded when, in January of this year, the CFTC permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of U.S. crude oil futures on the ICE futures exchange in London – called “ICE Futures.” Previously, the ICE Futures exchange in London had traded only in European energy commodities – Brent crude oil and United Kingdom natural gas. As a United Kingdom futures market, the ICE Futures exchange is regulated solely by the United Kingdom Financial Services Authority. In 1999, the London exchange obtained the CFTC’s permission to install computer terminals in the United States to permit traders here to trade European energy commodities through that exchange.

Then, in January of this year, ICE Futures in London began trading a futures contract for West Texas Intermediate (WTI) crude oil, a type of crude oil that is produced and delivered in the United States. ICE Futures also notified the CFTC that it would be permitting traders in the United States to use ICE terminals in the United States to trade its new WTI contract on the ICE Futures London exchange. Beginning in April, ICE Futures similarly allowed traders in the United States to trade U.S. gasoline and heating oil futures on the ICE Futures exchange in London.

Despite the use by U.S. traders of trading terminals within the United States to trade U.S. oil, gasoline, and heating oil futures contracts, the CFTC has not asserted any jurisdiction over the trading of these contracts. Persons within the United States seeking to trade key U.S. energy commodities – U.S. crude oil, gasoline, and heating oil futures – now can avoid all U.S. market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.

As an increasing number of U.S. energy trades occurs on unregulated, OTC electronic exchanges or through foreign exchanges, the CFTC’s large trading reporting system becomes less and less accurate, the trading data becomes less and less useful, and its market oversight program becomes less comprehensive. The absence of large trader information from the electronic exchanges makes it more difficult for the CFTC to monitor speculative activity and to detect and prevent price manipulation. The absence of this information not only obscures the CFTC’s view of that portion of the energy commodity markets, but it also degrades the quality of information that is reported. A trader may take a position on an unregulated electronic exchange or on a foreign exchange that is either in addition to or opposite from the positions the trader has taken on the NYMEX, and thereby avoid and distort the large trader reporting system.

Not only can the CFTC be misled by these trading practices, but these trading practices could render the CFTC weekly publication of energy market trading data, intended to be used by the public, as incomplete and misleading.

[snip]

Because the over-the-counter energy markets are unregulated, there are no precise or reliable figures as to the total dollar value of recent spending on investments in energy commodities, but the estimates are consistently in the range of tens of billions of dollars. Last fall, the International Monetary Fund reported, “Industry estimates suggest that approximately $100-$120 billion of new investment in the past three years has been in active and passive energy investment vehicles.” The New York Times cited an estimate that there were “at least 450 hedge funds with an estimated $60 billion in assets focused on energy and the environment, including 200 devoted exclusively to various energy strategies.”

The increased speculative interest in commodities is also seen in the increasing popularity of commodity index funds, which are funds whose price is tied to the price of a basket of various commodity futures. Goldman Sachs estimates that pension funds and mutual funds have invested a total of approximately $85 billion in commodity index funds, and that investments in its own index, the Goldman Sachs Commodity Index (GSCI), has tripled over the past few years to $55 billion. In March of this year, petroleum economist Philip Verleger calculated that the amount of money invested in commodity index funds “jumped from $15 billion in 2003 to $56 billion in 2004 and on to $80 billion today.”

[snip]

A number of energy industry participants and analysts have noted the divergence between the ample supplies of crude oil and natural gas, and record-high prices for those commodities, and have attributed some of this disconnect to the presence of speculators in the market. “Gold prices don’t go up just because jewelers need more gold, they go up because gold is an investment,” one consultant said. “The same has happened to oil.”

“The answer to the puzzle posed by rising prices and inventories, industry analysts say, lies not only in supply constraints such as the war in Iraq and civil unrest in Nigeria and the broad upswing in demand caused by industrialization of China and India. Increasingly, they say, prices also are being guided by a continuing rush of investor funds in commodities investments.”

Another gas trader said: “It’s all about futures speculators shooting for irrational price objectives, as well as trying to out-think other players – sort of like a twisted game of chess.”

“[T]he basic facts are clear,” he added, “this market is purely and simply being controlled by over-speculation.” Tim Evans, senior analyst at IFR Energy Services, stated, “What you have on the financial side is a bunch of money being thrown at the energy futures market. It’s just pulling in more and more cash. That’s the side of the market where we have runaway demand, not on the physical side.”

Some traders charge that certain hedge fund managers have purposefully contributed to a misperception that there is a shortage of supply. “There’s a few hedge fund managers out there who are masters at knowing how to exploit the peak theories [that the world is running out of oil] and hot buttons of supply and demand, (and) by making bold predictions of shocking price advancements to come (they) only add more fuel to the bullish fire in a sort of self-fulfilling prophecy.”

[snip]

Several analysts have estimated that the influx of speculative money has tacked on anywhere from about $7 to about $30 per barrel to the price of crude oil. Even OPEC officials are concerned that a shift in the market from high futures prices relative to current prices, to lower futures prices relative to current prices (i.e. from contango to backwardation) could precipitate a “quick drop of $20 a barrel or more.” Noting that “fundamentals are in balance and stock levels are comfortable,” the president of the OPEC cartel, Edmund Daukoru, recently attributed the current price levels to “refinery tightness, geopolitical developments and speculative activity.” Other traders have pointed out the possibility of a sharp drop in price.

“At some point, this oversupplied market has to begin to break down this house of cards which is\ dominated by speculative entities,” one futures trader noted, “and when those entities decide to start liquidating their futures positions in crude and gas, look out below.”

Generally, economists struggle to quantify the effect of speculators on market prices. Part of the difficulty is due to the absence of specific data about the strategies of particular traders or classes of traders. The CFTC’s weekly Commitment of Trader reports are not specific or precise enough to provide the basis for rigorous quantitative analysis, and commodity traders are, as a rule, reluctant to distribute their data for such purposes.

Another difficulty is separating cause from effect: are high prices caused by an increase in speculation, or do more speculators enter the market when prices become more volatile because that is when the profit opportunities arise?

[snip]

CFTC staff study. In contrast to the studies that have found a relationship between speculative activity and price, a CFTC staff study released in April 2005 found, in general, “no evidence of a link between price changes and MMT [managed money trader] positions” in the natural gas markets and “a significantly negative relationship between MMT positions and price changes (conditional on other participants trading) in the crude oil market.” The CFTC staff found, generally, that these managed money funds tended to follow what the commercial participants in the market were doing, and tended to trade less frequently than commercial traders.

NYMEX study. A second study that found no relationship between hedge fund activity and volatility was conducted by the NYMEX. Overall, the NYMEX found that during 2004, “hedge fund trading activity comprised a modest share of trading volume in both crude oil and natural gas futures markets,” and comprised “a relatively modest share of open interest.” It also found that hedge fund participation during this period tended to decrease volatility. “In short,” the NYMEX stated, “it appears that Hedge Funds have been unfairly maligned by certain quarters who are seeking simple answers to the problem of substantial price volatility in energy markets, simple answers that are not supported by the available evidence.”

[snip]

“[D]espite those [NYMEX and CFTC] reports,” one trade publication reported, “a majority of industry professionals still contend that there are too many large speculative entities actively engaged in the market – with fund accounts taking on massive equity positions in the commodities.” Another article reported that many traders have “scoffed” at these two studies, “saying that they focused only on certain months, missing price run-ups.”

[snip]

For example, it has been reported that in 2004, Goldman Sachs and Morgan Stanley, the two leading energy trading firms in the United States, earned a total of about $2.6 billion in net revenues from commodities trading, mostly from energy commodities. For 2005, Goldman Sachs and Morgan Stanley each reportedly earned about $1.5 billion in net revenue from energy transactions.

A recent article in Trader Monthly magazine included short profiles of the “100 Highest Earning Traders” for 2005, as ranked by the magazine. Overall, Trader Monthly reported, “On Wall Street, some of the scores were gargantuan, as bulge-bracket banks enjoyed one of the most profitable years in the history of the markets, from asset-backed to credit and crude to crack spreads.” Although the rankings are based on estimates and anecdotal information, and the article does not explain how the profiled traders generated their income, it nonetheless provides some information regarding the magnitude of some of the earnings of leading energy commodity traders in 2005. The Trader Monthly rankings group these traders into several categories: hedge fund managers, Wall Street Traders, and “the rest,” which includes traders working for brokerage firms that own seats on the NYMEX.

At the top of the Trader Monthly list, T. Boone Pickens was reported to have earned between one and one-and-a-half billion dollars in energy trading in 2005. The magazine reports that Mr. Pickens’s main commodities fund earned a return of approximately 700 percent in 2005, which it “believes is the largest one-year sum ever earned.” Another hedge fund magazine, Alpha, estimated that Mr. Pickens’s trading strategies earned $1.4 billion in 2005, largely due to his bets on crude oil.

Following an interview with Mr. Pickens, the Associated Press reported, “Oil tycoon Boone Pickens’ bet that energy prices would rise made him more money in the past five years than he earned in the preceding half century hunting for riches in petroleum deposits and companies.” During this interview, which occurred in mid-2005, when the price of oil was approaching a then-record $60 per barrel, Mr. Pickens stated, “I can’t tell for sure where [prices are] going, other than up.” Mr. Pickens’s success in predicting price increases may have even created its own momentum for further price increases – according to Natural Gas Week, “[Mr. Pickens] regularly talks up crude oil and natural gas prices on financial market cable TV. Traders and futures brokers report that each time this happens, more speculative interest is drawn to energy futures markets.”

Also at the top of the list of energy traders is John Arnold, a former Enron trader who left Enron in 2002 to start his own hedge fund, Centaurus Energy, with three employees and $8 million of his own money. As of January of this year, Centaurus employed 36 people and had about $1.5 billion in assets. At a recent energy conference, Mr. Arnold said he “looks to place bets on a market that he determines is ‘biased,’” meaning that the market is not reflecting the fair value for a product. “We ask ourselves can we identify what is forcing a market to price a product at an unfair value, and then, what will push it back to fair value.” Mr. Arnold also stated how a significant amount of speculative trading was taking place on the unregulated overthecounter Intercontinental exchange (ICE).

“‘Trading never went away,’ Arnold said, ‘What has changed is the non-commercial type of interest.’ Intercontinental Exchange, he said, has provided huge new opportunities, as has NYMEX’s Clearport trading. ‘Because of this, there has never been as much investor interest . . . as there is today.’”

[snip]

Until recently, the trading of U.S. energy futures was conducted exclusively on regulated exchanges within the United States, like the NYMEX, and subject to extensive oversight by the CFTC and the exchanges themselves in order to detect and prevent price manipulation. Under the Commodity Exchange Act, the purpose of CFTC regulation is to deter and prevent price manipulation, ensure the “financial integrity” of transactions, maintain market integrity, prevent fraud, and promote fair competition. This regulation and the resulting transparency has bolstered investor confidence in the integrity of the regulated U.S. commodity markets and helped propel U.S. exchanges into the leading marketplace for many commodities.

Pursuant to its statutory mandate to detect and prevent price manipulation, the CFTC has imposed a variety of reporting requirements and regulations on the trading of commodity futures and options. NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. The CFTC uses these Large Trader Reports, together with daily trading data providing price and volume information, to monitor exchange activity and detect unusual price movements or trading.

None of this oversight to prevent price manipulation, however, applies to any of the energy trading conducted on OTC electronic exchanges. As a result of a provision inserted by House and Senate negotiators during the waning hours of the 106th Congress into legislation that became the Commodity Futures Modernization Act of 2000 (CFMA), the Commodity Exchange Act exempts from CFTC oversight all trading of energy commodities by large firms on OTC electronic exchanges.

[snip]

In 2000, a half dozen investment banks and oil companies formed the Intercontinental Exchange (“ICE”) for OTC electronic trading in energy and metals commodities. The Atlanta based ICE is an electronic exchange open only to large commercial traders that meet the definition of an “eligible commercial entity” under the Commodity Exchange Act. According to ICE, its market participants “must satisfy certain asset-holding and other criteria and included entities that, in connection with their business, incur risks relating to a particular commodity or have a demonstrable ability to make or take delivery of that commodity, as well as financial institutions that provide risk-management or hedging services to those entities.”

Today, ICE operates the leading OTC electronic exchange for energy commodities. ICE describes its participants as “some of the world’s largest energy companies, financial institutions and other active contributors to trading volume in global commodity markets. They include oil and gas producers and refiners, power stations and utilities, chemical companies, transportation companies, banks, hedge funds and other energy industry participants.” According to ICE, its electronic markets now constitute “a significant global presence with over 9,300 active screens at over 1,000 OTC participant firms and over 440 futures participant firms as of December 31, 2005.”

Unlike NYMEX, ICE does not require its participants to become formal members of its exchange or to join a clearinghouse. Any large commercial company qualifying as an eligible commercial entity can trade through ICE’s OTC electronic exchange without having to employ a broker or pay a fee to a member of the Exchange.

[snip]

The history of commodity markets demonstrates it is unrealistic to rely on the self-interest of a few large traders as a substitute for dedicated, independent oversight to protect the public interest. Commodity traders have no responsibility or obligation to look out for public rather than private interests. In some cases, it could be a breach of fiduciary duty for officers of a private corporation to look out for interests other than those of the corporation’s shareholders.

Most recently, the Enron scandal, which involved misconduct by a number of traders at large energy and trading companies active in OTC trading, is clear evidence of how a few sophisticated, unscrupulous traders can harm not only other market participants, but also the public at large by artificially increasing prices. Consumers paying artificially high energy prices suffer the same harm regardless of whether the price was manipulated on an OTC electronic exchange or on a regulated futures market.

Just who is your fantasy buyer for the contracts the speculator wants to dump, just before expiration?

And, we have a winner!!!

Aren’t you thinking of options as opposed to futures contracts?

The buyer of a contract to take delivery could purchase a contract to deliver and thereby neutralize both.

Fantasy buyer? Have you looked at the volume on NYMEX lately?

There is exactly no shortage of buyers. In fact, the whole problem w/energy mkts these days is that there is an (artificial) shortage of sellers, not buyers.

Also, you don't use the tactic I described, called 'rolling', btw, ''just before expiration''. You use it starting 2-3 weeks before expiration, esp. if you're a big players, as witness these now-infamous ''index specs''.

Now, that said, a truly large index player would not (actually his bank would not, but let's keep it simple) dump 50,000-100,000 lots at one swoop; it would take 2-3-4 days, perhaps even up to 8-10 days, to accomplish the roll w/o too much price distortion.

See, the index specs just want to get and stay long in various futures mkts, the theory being that, by doing so, their entire portfolios are more 'balanced' on an asset-class basis. I happen to think that that is horse puckey; but, then again, it ain't my money.

Oh, one other thing. To the index specs, it's ''price no object''. They WILL be long, and damn the costs and the torpedoes. This attitude is one reason that energy pricing has become as out-of-whack as it is.

Good to see another voice of reason.

I'm stunned at how easily so many Freepers fall for populist crap.

Not at all. The difference between options and futures is quite clear (in fact, I wrote a book on this subject in 2003). Especially so when considering the manner in which a large number of capital pools are managed today.

The index specs who are at the root of the energy pricing problem in the US (worldwide, too) right now are using hard-asset-based portfolio theory. Futures, while not hard assets in their own right, are in any case potential assets, and serve as a reasonable proxy for owning, say, 25,000 lbs of physical copper, or 1,000 bbls of WTI crude. As long as a futures contract nearing expiration can be replaced with another futures contract that expires further out, at any given time of the portfolio manager's choice, it's fair to label a futures contract as a hard asset, and treat it as such for analytical purposes.

Options, otoh, are principally only financial assets. Their value is derived only partially from the value of the underlying mkt, and this is all the difference to an asset-backed trader. The price of a pound of copper is X cents; X cents is the asset value of the copper, right? However, we can't say that about an option on a pound of copper, because two components of the option's price are time remaining and implied volatility -- neither of which have anything to do with copper per se -- and thus both these components are disdained by the asset-backed trader.

I don't claim that these attitudes are necessarily sacrosanct, or in numerous cases even reasonable. They are, however, prevalent; they rule the roost in much of portfolio theory today, and so cannot be ignored.