(By Ranjan Bhaduri, PhD, CFA, CAIA, Member, AllAboutAlpha.com Editorial Board)  Commodities have always had a reputation for risk, reward and volatility.  Managed futures – a set of strategies aimed at harnessing the return potential of commodities (and of other financial instruments upon which futures contracts are written), has long played a central role in the alternative investment industry.

As you might expect, managed futures have always been more volatile than many of the alternative investment cousins.  But does this mean they serve no role in a diversified portfolio?   Researcher and Harvard professor John Lintner addressed this question back in 1983 in a seminal paper presented at the Annual Conference of the Financial Analysts Federation in Toronto titled “The Potential Role of Managed Commodity-Financial Futures Accounts (and/or Funds) in Portfolios of Stocks and Bonds.”

Firstly, Lintner found the risk-adjusted return of a portfolio of managed futures to be higher than that of a traditional portfolio consisting of stocks and bonds.  But he also observed that portfolios of stocks and/or bonds combined with managed futures showed substantially less risk at every possible level of expected return than portfolios of stocks and/or bonds alone. The following passage from Lintner’s work furnishes good insight on his findings: More…