Commodities

Investors face numerous challenges when seeking to estimate the prospective performance of a longonly investment in commodity futures. For instance, historically, the average annualized excess return of the average individual commodity futures has been approximately zero and commodity futures returns have been largely uncorrelated with one another.

For this study of the simple properties of commodity futures as an asset class, an equally weighted index of monthly returns of commodity futures was constructed for the July 1959 through December 2004 period. Fully collateralized commodity futures historically have offered the same return and Sharpe ratio as U.S. equities. Although the risk premium on commodity futures is essentially the same as that on equities for the study period, commodity futures returns are negatively correlated with equity returns and bond returns.

Timberland is a relatively new asset class, having emerged as an attractive investment option for institutional investors in the early 1980s.

The first decade of the 21st century has perhaps witnessed more structural change in commodity futures markets than all previous decades combined. Not only have trading volumes and open interest increased markedly, but this time period also saw historic changes in both trading and participants. The available literature indicates that the irrational and harmful impacts of the structural changes in commodity futures markets over the last decade have been minimal. In particular, there is little evidence that passive index investment caused a massive bubble in commodity futures prices.