The Handbook of Commodity Investing

CHAPTER 23

Types of Commodity Investments

Lynne Engelke

Director, Performance Analysis and Risk Management

Hedge Fund Management Group

Citi Alternative Investments

Jack C. Yuen

Vice President/Analyst

Hedge Fund Management Group

Citi Alternative Investments

Commodities can provide benefits as a source of absolute return, a hedge against inflation, and a diversifying asset, uncorrelated to a traditional portfolio of stocks and bonds. However, commodities have not historically been a part of most investors' portfolios. Many institutional investors have little or no experience in direct commodity investing and many are specifically excluded from the market by policy or statute. High net worth individuals and retail investors historically have been limited in their direct investments to mostly precious metals in the form of coins or bullion.

The growing popularity of commodity investing has in part been fueled in recent years by a proliferation of new investment vehicles that have made commodity investing available to a wider audience. Investors, based on their risk-return criteria and individual requirements, may select from a broad range of financial instruments and investment vehicles. These investment vehicles take advantage of the ability to indirectly invest in commodities through financial instruments such as futures, options, and commodity-related equities. There are various types of investment vehicles, including mutual funds, exchange-traded funds (ETFs), managed futures and ...