CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

24.1 INTRODUCTION

While it is impossible, in a short synopsis, to convey all of the roles played by commodity investments in asset allocation, this chapter provides a brief outline of the roles of commodity investments and highlights some of the research that has helped foster the interest in commodities as an investment. While a great deal of commodity research dates back 75 or more years, research on the role of commodities in asset allocation began to gain momentum only in the late 1970s. Since then, many publications have shown that commodity investments provide both return enhancement as a stand-alone investment and risk-reduction opportunities for a range of traditional and alternative investments. In addition, commodities have been shown to provide unique investment opportunities relative to investor exposure to inflation and other macroeconomic events. This chapter also discusses the unique sources of returns to commodities and the statistical properties of their returns, as well as the ability of commodities to provide diversification as well as a hedge for inflation risk, business cycle risk, and event risk.

Select Highlights in Commodity Research

1970s	Commodities are viewed as high-risk investments. Most investment is made indirectly, through equities or bonds.
1978	Greer shows that a collateralized basket of commodity futures contracts had lower risk and higher returns than an equity basket (over the time frame of his study).
1980	Bodie and Rosansky illustrate ...