The Tactical and Strategic Value of Commodity Futures
Claude B. Erb
Campbell R. Harvey
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative
January 12, 2006
Investors face a number of challenges when seeking to estimate the prospective performance of a long-only investment in commodity futures. For instance, historically, the average annualized excess return of individual commodity futures has been approximately zero and commodity futures returns have been largely uncorrelated with one another. However, the prospective annualized excess return of a rebalanced portfolio of commodity futures can be equity-like. Certain security characteristics, such as the term structure of futures prices, and some portfolio strategies have historically been rewarded with above average returns. Avoiding naïve extrapolation of historical returns and striking a balance between dependable sources of return and possible sources of return is important. This is the unabridged version of our 2006 publication in the Financial Analysts Journal.
Number of Pages in PDF File: 61
Keywords: Strategic asset allocation, Tactical asset allocation, Diversification return, Roll return, Momentum, Market timing, Convenience yield, Contango, Backwardation, Normal backwardation, Commodity correlation, Commodity risk factors, Commodity term structure, Trading strategies, Overlay strategies
JEL Classification: G12, G13, E44, Q11, Q41, Q14
Date posted: February 3, 2005
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