The Handbook of Commodity Investing

CHAPTER 21

Introducing Alternative Investments in a Traditional Portfolio: The Case of Commodities, Hedge Funds, and Managed Futures

Mark S. Shore

Head of Risk

Octane Research, Inc.

While recent years have seen an increased demand for commodity investments, especially from institutional investors, there has also been an increase in the development of new commodity indexes. This increased demand was the motivational factor in asking three very simple, but key questions that led to this chapter: (1) What is the performance result of allocating to commodities as a method of diversification and risk management in a traditional portfolio? (2) Relative to other alternative investments such as hedge funds and managed futures, are commodities more or less efficient as a diversifier with traditional investments? And (3) can commodities complement other alternative investments in the portfolio? While the first question has been discussed by many commentators over the years, we believe that the relationship of commodities to other alternative investments as found in the second and third questions has been less frequently discussed. As alternative investments become more popular, the importance of this discussion increases.

In our discussion in this chapter, the Goldman Sachs Commodity Index (GSCI) is used as our sample commodity index because it makes up the majority of tradable commodity indexes. The GSCI is parsed into three indexes: the Spot Index, Excess Index, and Total Return Index. ...