long only commodities dont diversify

The correlation of commodity performance to equity markets has increased to such an extent that long-only commodity strategies have lost their punch as portfolio diversifiers, say commentators.

long only commodities dont diversify


In addition, long/short strategies have dominated long-only strategies in terms of raw and risk-adjusted performance between 1992 and 2011, according to the EDHEC-Risk Institute.

A recent study by the group compared the performance and risk characteristics of long-only commodity index investments, which are favoured by passive investors, with those of long/short commodity strategies more frequently used by hedge fund managers.

Over the period, the mean excess return of the S&P-GSCI was 0.64% per year, while the long-only equally-weighted portfolio of the twenty seven commodities in the study was 4.28%.

In comparison, the average mean excess return of the long-short portfolios was 7.99% when only one type of signal was used and 9.03% when two signals were used in combination.

The results of the study led EDHEC-Risk to question the suitability of long-only commodity investing as a means of diversifying investors’ portfolios.

Correlation increasing

It said since the downfall of Lehman Brothers the link between the performance of long-only commodity portfolios and equities had strengthened considerably.

On the other hand, long/short commodity investing had continued to offer excellent diversification benefits alongside equities and bonds.

Thomas Becket, manager of the PSigma Dynamic Multi-Asset Fund, said: "Most of our investments in commodities are long/short, it’s all about liquidity. Commodities have a distinct correlation to equities on the positive and negative side.

"We typically do our commodity investing through Investec Enhanced Natural Resources, which has a long/short remit. If you use a long only approach you might as well invest in equities."

For investors, Becket recommended the use of a long/short manager for the flexibility they provide. But he added if they are a believer in the commodity growth story, they should make sure the manager has a predominantly long focus rather than a bearish one to take advantage of the sector’s long-term potential.



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