Bloomberg does a nice job describing some problems with investing in “long only” commodity strategies here: http://www.bloomberg.com/news/articles/2016-09-21/buy-hold-lose-how-commodities-roll-is-undercutting-investors
“While spot prices tracked by the Bloomberg Commodity Index are up 16 percent this year, the total return for funds linked to the gauge was about half that amount, data compiled by Bloomberg show. The performance gap has been widening since the first quarter of 2015 and is now the largest in five years, just as investors pour more money into commodities.
Other indexed products have a similar shortfall. Through Wednesday, the S&P GSCI Index had returned 2.5 percent for the year; spot prices for its constituent commodities were up about 14 percent. United States Oil Fund LP, the leading exchange-traded fund for crude investors, lost 5.5 percent while West Texas Intermediate oil, which it tracks, has risen 22 percent.”
“Part of the problem is how fund managers try to mimic price changes. Rather than buy raw materials that have to be stored, they use futures contracts. But when those expire — sometimes every month — returns suffer if contracts are replaced at higher cost. That occurs when markets are in contango, meaning that commodities for immediate delivery are cheaper than in the future, as they are now for everything from corn to crude.”
Do read the whole article…
Me: In 2008 and beyond, another problem arose… Commodities, especially oil, became highly correlated to equity markets… Large diversified funds lost the diversification that the strategy provided…
And why would anyone invest in “long only” commodities in the first place? There is no natural income stream like one receives from owning stock… Inflation protection with diversification and yield roll were successfully sold to investors as benefits during the 90’s and 00’s…. The yield roll occurs because, in theory, producers hedge by selling forward which would tend to keep the front month price higher than the back (backwardation)… But after 2008, investors were losing on the roll with a now correlated asset… Some decided to invest in oil and other commodity producers, who, by selling forward to hedge, took advantage of “contango” markets (higher forward month prices)… This, in turn, helped increase valuations of oil producers leading to spinoffs of the producing arms of integrated oil companies…
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