ABSTRACT
Commodity investments have gained considerable interest over the past decade. For traditionally diversified investors, an allocation to a fund that invests exclusively in commodity markets offers not only a hedge against inflation, but also effective diversification due to its low correlation with traditional asset classes. Over the long run, commodity investment funds show equity-like returns, but are accompanied by lower volatility and shortfall risk. This chapter discusses the advantages of long–short commodity funds as meaningful diversifiers within a portfolio of traditional assets. The managed futures category of hedge funds, including commodity funds, performed particularly well during the 2008/2009 crash periods. Positive performance during crashes can be attributed to: the ready ability to go long or short; deep liquidity and low transaction costs allowing for dynamic asset allocation and the opportunity to take advantage of volatility via rebalancing gains and regime changes.
