By Samuel Lee
Negative real interest rates, coordinated money-printing by Bernanke and his international counterparts, rising emerging markets–little wonder that commodity fund assets have tripled since the commodity-price peak in mid-2008. It helps that back tests show long-only, futures-based commodity indexes had equitylike returns and little correlation to the markets, the holy grail of portfolio diversification. The rush to carve out a static allocation to commodity indexes such as the S&P GSCI or the DJ-UBS Commodity Index is, in our view, suboptimal behavior. Without understanding the drivers of commodity futures returns and capitalizing upon them, investors will fail to capture the biggest sources of commodity futures profits.
Not Always Positive Expected Return
A long-only position in commodity futures is not always expected to provide an excess return above the risk-free rate, as is the case with stocks and bonds (the market will always try to price stocks and bonds such