The Impact of Financialization on the Benefits of Incorporating Commodity Futures in Actively Managed Portfolios

Abstract

This paper examines the return performance and diversification benefits of both buy-and-hold and tactical portfolios of commodity futures. We fuse together both of these highly desired investment benefits of the unique asset class to provide a thorough analysis of the commodities market given the changes it has undergone over the last decade due to the rapid increase in investor participation. We find that tactical portfolios based on basis and net speculation offer the highest potential returns. However, in the post-2000 era, the risk-adjusted returns of many of the commodity portfolio examined are insignificant. Furthermore, we find the diversification properties of these commodity portfolios have largely broken down for investors of traditional buy-and-hold benchmark portfolios, and to a lesser extent actively managed equity-based benchmark portfolios, since the early 2000’s. This breakdown has been much less severe for the international buy-and-hold portfolios when compared to the US domestic buy-and-hold counterpart.

Keywords: Commodity Futures; Futures Returns; Diversification; Spanning Tests; Portfolio Returns

JEL Classification: G11, G13, G14