Cash keeps pouring into commodities, undeterred by record prices, U.S. regulatory changes and an unusual oil market structure, with this year's index-linked inflows on course to top $3.5 billion.

Continuity is really the story here, said Matthew Schwab, managing director of AIG Financial Products Corp.

Over the first three months of the year, investors have continued to allocate funds at roughly the same pace that has prevailed over the past 12 months, he told Reuters.

Investment flows are hard to track as many are handled through over-the-counter derivatives, which are not publicly recorded.

The amount of money flowing into the U.S. commodity-linked mutual funds, which invest in groups of assets on behalf of individuals and institutions, provides a gauge.

Monthly inflows in the first quarter were about $300 million and if that continued for the rest of the year, the growth would exceed $3.5 billion, Schwab said.

By March 2006, the funds had poured in a total of around $80 billion, according to industry estimates.

Mutual funds tend to gain access to commodities though indexes, such as the Dow Jones-AIG Commodity Index.

Although record high prices have ensured good returns, profits from the indexes have been eroded by protracted contango in the oil market, meaning the front-month contract is cheaper than that for later delivery oil.

This situation, the opposite of the typical oil market structure, cuts back returns from rolling prompt into later contracts but Schwab said that it was not a major concern for the DJ-AIGCI.

If a commodity index is heavily weighted toward one commodity ... then this may be an issue. In a diversified index, like the DJ-AIGCI, it is less of a concern, Schwab said.

IRS RULING

Some analysts have said U.S. regulatory changes have cast a shadow, albeit temporarily, over commodity investment. But the biggest of the U.S. commodity-linked mutual funds, PIMCO, has said it is business as usual.

The Internal Revenue Service, the U.S. government agency responsible for tax law enforcement, last December issued a ruling that is limiting the use of swaps for accessing commodity indexes and leading mutual funds to switch to structured notes.

PIMCO, which gains exposure for its CommodityRealReturn Strategy Fund via the DJ-AIGCI, is switching from total return swaps to structured notes.

Total return swaps are contracts under which a fund agrees to pay interest plus a small fee in exchange for the total return of a commodity index, while the term structured notes covers a variety of instruments whose value is determined by the price movement of the underlying asset.

In our transition from swaps to structured notes, it's business as usual, said PIMCO senior vice president Bob Greer.

PIMCO has reported it has switched $5.4 billion of its approximate $12 billion asset base into structured notes with 10 different issuers.

The deadline to complete the process is June 30.

The second largest of the U.S. commodity-linked mutual funds, Oppenheimer, closed its Real Asset Fund, which invests in commodity futures via the Goldman Sachs Commodity Index (GSCI), to new investors from the end of April. A spokeswoman said this was not related to the IRS ruling.

In a statement Oppenheimer said only that it believed it was in the best interest of current shareholders to curtail the flow of new assets in the fund at this time given the current availability and environment for commodity-linked instruments.

Investment