Lehman sounds alarm; commods indices near $300 bln

NEW YORK (Reuters) - This year's explosion in commodity investments suggests investors may be overlooking volatility for performance as they pile into index funds that have amassed almost $300 billion, Lehman Brothers said Friday.

"It is important to recognize the limitations inherent in commodities given their cyclicality and high volatility," the investment bank said in a report.

Lehman said it was not surprised that the weak dollar, unattractive equity markets and higher inflation expectations had all contributed to this year's phenomenal growth in commodity prices and the indices that track them.

"But we also find a potentially alarming degree of past performance-chasing momentum," it said.

Crude oil, gold, copper, soybean, corn and wheat futures have hit record highs this year, leading to unprecedented gains for commodity indices such as the Reuters-Jefferies CRB .CRB, the S&P GSCI .SPGSCI and the Dow Jones AIG .DJAIG.

The CRB, for instance, recorded its best quarter in 35 years between March and June. But July was also the worst month in 28 years for the index as prices of oil and other key raw materials tumbled from their highs.

In a report issued Friday, Lehman estimated assets under management tied to commodity indices at $297 billion.

That was up $62 billion from the $235 billion figure it gave during a similar estimate in May.

In Friday's report, Lehman said commodity indices had grown by about $98.1 billion in value since January 2006. The $62 billion rise in the last two months represents 63 percent of the two years' growth.