The Handbook of Commodity Investing

CHAPTER 8

Performance Characteristics of Commodity Futures

Claude Erb, CFA

Managing Director

TCW

Campbell R. Harvey, Ph.D.

J. Paul Sticht Professor of International Business

Fuqua School of Business

Duke University

Christian Kempe, CFA

Portfolio Manager

FOCAM AG

In the early years of this century, investors shunned commodity investments. This was due to their only moderate returns having been achieved in the 1980s and 1990s, their perceived high-risk profile, and because research was lacking. Little knowledge was available about this asset class. In the very-recent past, however, many investors have been moving funds into commodities since this asset class has generated remarkably good returns over the five-year period ending in 2006. Prominent institutional investors, including Harvard University, PGGM (Dutch health and welfare sector fund), and the Ontario Teachers' Pension Plan, have allocated some portion of their assets to commodities. According to Layard-Liesching, institutional investors have invested $120 billion in long-only commodity strategies, while an estimated $50 billion of this amount is invested in the Goldman Sachs Commodity Index (GSCI).¹ Akey estimates that assets linked to passive commodity indexes surged to $84 billion at the end of the first quarter of 2006, which represents a nearly doubling from the year-earlier estimate of $40 billion.² CalPERS estimates that open interest in commodity futures were $350 billion at the end of 2005.³ The investment and academic ...