An Empirical Examination of the Performance of Commodity Mutual Funds

The use of commodities to hedge inflation risk and diversify portfolios is generally thought to be an important consideration for portfolio management. Direct investment in commodities or commodity derivatives requires that investors have significant assets and/or expertise in these commodities or t...

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Bibliographic Details
Published in:The journal of wealth management 2016-04, Vol.18 (4), p.90-106
Main Authors: Kanuri, Srinidhi, McLeod, Robert W., Malhotra, D.K.
Format: Article
Language:English
Subjects:
Abnormal returns
Agricultural commodities
Bear markets
Bond portfolios
Capital assets
Commodity prices
Cost of living
Diversification
Economic crisis
Equity
Equity funds
Forest products
Index funds
International finance
Investment advisors
Investment policy
Investors
Literature reviews
Market timing
Metals
Mutual funds
Natural resources
Precious metals
Scandals
Stock exchanges
Studies
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Summary:The use of commodities to hedge inflation risk and diversify portfolios is generally thought to be an important consideration for portfolio management. Direct investment in commodities or commodity derivatives requires that investors have significant assets and/or expertise in these commodities or their respective derivatives markets. As an alternative to direct investment, investors in recent years have increasingly resorted to the use of commodity-based mutual funds. In this article we evaluate the performance, persistence, market timing, and selectivity of four categories of mutual funds whose returns are based on commodity prices. Our period of analysis begins with each fund's inception and ends in December of 2012. Our results indicate that these funds have not been able to create positive alphas for their investors, have negative or insignificant performance persistence, and have no market timing ability. Some of the categories of funds, however, do exhibit some selectivity. We did find that when these commodity-based funds' performance was evaluated during specific time periods of market downturns (e.g., the 2000 stock market downturn and the financial crisis that began in late 2007), their performance was significantly positive, which indicates that these funds provide a good hedge during bear markets/financial crises.
ISSN:1534-7524
2374-1368
DOI:10.3905/jwm.2016.18.4.090