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Structural Sources of Return and Risk in Commodity Futures Investments Authors: Hilary Till Source: Commodities Now Date: 2006 Size: 692617 Bytes |
By now it has become well-known that commodities have had superior performance over the past four and a half years; commodity investing has become a sign of sophistication, with commodities being able to provide "turbo returns if things go wrong for equities and bond markets", as stated by the chief investment officer of a large British pension plan. Because commodity index investing has grown from an obscure, niche strategy to a more widely accepted investment, there has been a need to better understand the drivers of historical commodity returns and risks. An investor would presumably then be in a better position to make informed judgments on the future prospects of a commodity investment.
This article, which first appeared in the London-based Commodities Now, provides the reader with a summary of the latest research in this area. The author provides a nuanced view of commodity futures investing. She discusses how commodity returns in the past mainly relied on portfolio effects and term-structure properties of individual commodity futures contracts, but also notes that rare trend shifts, as occurred in the early 1970s, can also be a meaningful source of returns for a commodity investor. She goes on to discuss some of the dynamic correlation properties of active commodity investing, properties that are also quite nuanced. Finally, she examines the prospects of the main constituent of the dominant commodity index – oil – and provides a framework for understanding what could potentially drive future returns.
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