The Strategic and Tactical Value of Commodity Futures
Claude B. Erb
Campbell R. Harvey
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)
Financial Analysts Journal, Vol. 62, No. 2, pp. 69-97, April 2006
Investors face numerous challenges when seeking to estimate the prospective performance of a longonly investment in commodity futures. For instance, historically, the average annualized excess return of the average individual commodity futures has been approximately zero and commodity futures returns have been largely uncorrelated with one another. The prospective annualized excess return of a rebalanced portfolio of commodity futures, however, can be equity-like. Some security characteristics (such as the term structure of futures prices) and some portfolio strategies have historically been rewarded with above-average returns. It is important to avoid naive extrapolation of historical returns and to strike a balance between dependable sources of return and possible sources of return.
This paper is a shortened version of an earlier working paper. The unabridged version of this paper can be found at http://ssrn.com/abstract=650923.
Keywords: Derivative Instruments, Commodity Derivatives, Alternative Investments, Commodities, Portfolio Management, Asset Allocation
JEL Classification: G12, G13, E44, Q11, Q41, Q14Accepted Paper Series
Date posted: May 23, 2006
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