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

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24.2 REVIEW OF MAJOR ARTICLES AND STUDIES

It was not until the 1970s that academic studies highlighting the positive role of commodities in institutional portfolios appeared. In a seminal 1978 article published in the Journal of Portfolio Management, Greer tackled the issue of perceived risk in commodity futures. He showed that risk in a commodity position could be lowered significantly by full collateralization. Using a data set from 1960 to 1974, Greer calculated the returns of an unleveraged, collateralized basket of commodity futures contracts, including the collateral returns. He showed that such an index had higher returns and a lower maximum drawdown than an index of equities. Greer also pioneered efforts to demonstrate the benefit of diversifying an equities-only portfolio with the addition of commodity futures, showing that a rebalanced portfolio of stocks and commodities provided a steadier and higher rate of return than a stock-only portfolio (Greer 1978). Bodie and Rosansky (1980) echoed Greer's findings, showing that an equally weighted basket of commodity futures (constructed using 1950−1976 data) produced equity-like returns, as long as collateral returns were included. Of equal importance, the mean of the annual loss on the portfolio was significantly lower than if it had held equities only. Furthermore, they found that commodity futures provided valuable diversification benefits for an equity portfolio and were a very effective inflation hedge.

Since then, a steady ...

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