Alternative Viewpoints: Commodities not about “buy and hold”

Jun 29th, 2008 | Filed under: CAIA Alternative Viewpoints Columns, Guest Posts, Hedge Fund Industry Trends | By:
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With so much interest in commodities, we thought this might be a good time to revisit the rationale for so-called managed futures funds. But as Keith Black, CAIA, of consultant Ennis Knupp + Associates says, commodity investing is about a lot more than buying and holding commodities in hopes that the Chinese continue to buy new cars.

The Case for Commodities

Special to AllAboutAlpha.com by: Keith Black, CFA, CAIA, Associate, Ennis Knupp + Associates

Over the last several years, institutional investors have more than doubled their allocation (to over $200 billion), to financial products whose returns are linked to those of commodity indices. Commodities may be attractive due to: the low correlation between their returns and those of other asset classes, the high correlation of commodities returns with unexpected inflation, and the rising demand for commodities from fast-growing emerging markets countries, such as China and India.

In fact, when you look at the performance of these commodity indices during the best and worst quarters for the Wilshire 5000 (and quintiles in between), you can see that they have produced modestly positive returns in almost all quintiles. In fact, the correlation between commodity indices and other major asset classes is generally below 0.2 (see chart below): More…

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  1. [...] ‘Buy and hold’ commodity investing is not all it is cracked up to be.  (All About Alpha) [...]

  2. The timeframe under consideration makes the analysis useless. No one thinks commodities were good to buy and hold from 1970 to 2006. In different times, different asset classes outperform or underperform other asset classes.

    What is useful to know is that right now, stocks, bonds, and real estate are in bear markets. And commodities are in a bull market.

  3. [...] Keith Black on why you don’t want to buy and hold commodities. Actually, you don’t want to buy and hold anything (via Abnormal Returns). [...]

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