Strategic Allocation to Commodity Factor Premiums
Robeco Asset Management - Quantitative Strategies
Wilma De Groot
Robeco Asset Management
May 16, 2013
Investors may wonder whether the traditional arguments for investing in commodities still apply, as the return, diversification and inflation-hedging potential of commodities appear to have declined. In this study, we take a fresh look at the strategic allocation to commodities, considering not only the commodity market portfolio, but also various other factor premiums documented to exist in the commodities market. We find that a commodity factor portfolio consisting of the momentum, carry and low-volatility factor premiums exhibits a significantly better risk-adjusted performance than a conventional commodity portfolio. We also find that only such a commodity multi-factor portfolio adds value in the strategic asset allocation. As the traditional commodity market portfolio appears to deserve little or no role at all in the strategic asset allocation, we argue that investors should not postpone the consideration of alternative commodity factor premiums to a later stage of the investment process.
Number of Pages in PDF File: 21
Keywords: commodities, factor premiums, strategic asset allocation, momentum, carry, low-volatility
JEL Classification: G12, G13, E44, Q11, Q41, Q14working papers series
Date posted: May 17, 2013
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