With investors more prone to invest in alternatives in the wake of the financial crisis, they might want to consider commodities, according to an article written by three university professors and the managing director of the CFA institute in the upcoming issue of Journal of Investing.
Commodities can serve as a valuable hedge against inflation, and the best way to gauge when that is a concern of the government is when the Federal Reserve increases the discount rate, thereby indicating a shift to a restrictive monetary policy, according to the researchers.
Even in expansive monetary environments, supplementing a portfolio with commodity futures, albeit with a 15% allocation, substantially reduces portfolio risk and increases returns by as much as 2.4 percentage points, they said.
The surprising result from this study is that, remarkably, the timing of the allocation to commodities can be guided by a well-known and easily observable signal of Fed intentions. Given current inflationary concerns and the fact that the Fed recently raised interest rates, the study’s results suggest that an allocation to commodity futures may be appropriate.
The researchers recommend commodities futures for investors of all levels of risk tolerance and regardless of its value, growth, small- or large-cap emphasis.