By Alan Snyder, Shinnecock Partners
As published in Investment Advisor
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Some of the smartest investors realized years ago that commodities and financial futures belonged in their portfolios. Between practitioners and academic researchers, common agreement was reached that commodities and futures investing (CFI) does lower volatility (risk), increase returns and is uncorrelated to the typical asset classes of stocks and bonds. Everyone else became a believer after 2008, when CFI was the only sector left standing. Now that everyone is on board, the debate has shifted to passive versus active management. Can an index of commodities or financial futures deliver the same performance as actively managed accounts? Our research says active outperforms passive by a wide margin, and after all costs are accounted for, too.
CFI, a commonly-used designation, is a bit of a head-scratcher because it encompasses much more than it literally says. “Commodities investing” refers narrowly to assets which come out of the earth and are in physical form, whether an agricultural product, a metal, oil, etc. The “futures investing” part technically only describes a single and specific trading vehicle, a futures contract. While there are futures contracts on many different underlying assets and markets including currencies, bonds/interest rates, and commodities themselves, CFI, in practice, includes many more trading vehicles. For example, these others may include forwards, options, swaps, commodity-related equities and even cash and carry in the physical commodities. In fact, they may be the most diversified of all investment alternatives. Out of over 100 asset classes and markets commonly traded, approximately 65 have enough volume to be considered active and deep and are therefore used the most.
The challenge is how best to achieve CFI exposure and its positive benefits, while minimizing any detriments. Yet, we have all learned, heard and seen the risks, but know little about “how to get the benefits.” What follows could be fairly labeled an exposé of some of the myths, as well as a summarized comparison of alternatives.
