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The Case for Long/Short Commodities

July 2022

Why Own Commodities?

Commodities play a crucial role in both the global economy and in constructing a well-diversified portfolio. Commodity markets are generally large and liquid, and have grown substantially in recent decades. Commodities can play an important role in a portfolio by offering diversification and growth potential.

Access to Additional Markets

Commodity strategies offer access to very large markets that have grown significantly in recent decades. Historically, commodities have provided a potential hedge against inflation, and have been used as an investment to help participate in the global economy. As these markets fluctuate, a diversified commodities portfolio with the ability to go long or short can provide the potential for profits in both rising and falling commodity markets.

Graphic of commodities

Diversification

Long/short commodity strategies have historically provided strong returns, and their performance has generally not moved in tandem with stocks or bonds. Adding investments such as long/short commodities, with a low correlation to other asset classes, provides the potential to reduce risk and improve returns in traditional investment portfolios.

CorrelationJanuary 1, 2008 - June 30, 2022
Long/Short CommoditiesU.S. StocksBonds
Long/Short Commodities1.00
U.S. Stocks0.221.00
Bonds-0.030.111.00

Potential to Enhance Returns

While commodities can be an important asset class in a well-diversified portfolio, historically, the majority of commodity investments have been long-only. Long-only commodity investments can be highly volatile and subject to significant drawdowns when prices decline, as seen in the graph below. Adding long/short commodities to a portfolio provides the potential to generate higher returns, lower risk, and achieve better capital preservation than long-only commodities.

Growth of Investment

Growth of a Hypothetical $1,000 investment on January 1, 2008, through June 30, 2022

Chart showing the Growth of a Hypothetical $1,000 investment

Average Annual ReturnVolatilityMax Drawdown
Long/Short Commodities4.19%5.74%-12.96%
Long-Only Commodities-4.61%24.26%-87.22%

Index Returns As of June 30, 2022
1 Year5 Years10 Years
HFRI Macro Commodity Index20.48%8.78%4.13%
S&P 500 Index-10.62%11.31%12.96%
BBg U.S. Aggregate Bond Index-10.29%0.88%1.54%
S&P GSCI Commodity Index45.05%11.67%-1.83%

 

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