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Digital Subscriptions > The Hedge Fund Journal > Issue 116 - September 2016 > L/S Commodity Investment for Diversified Portfolios

L/S Commodity Investment for Diversified Portfolios

An attractive proposition

The global search for uncorrelated returns continues as institutional investors deal with “priced to perfection” fixed income and equity markets in a risk on/risk off binary environment subject to economic and geo-political headlines. Various stages of Quantitative Easing (“QE”) have led to a rally in most asset prices as well as growing correlations between their seemingly unrelated return streams, against a backdrop of uncertain economic fundamentals. In this environment, those seeking to add a true alpha strategy should take a fresh look at the uncorrelated commodity sector. More specifically, a compelling opportunity exists in long/short commodities accessed via a discretionary commodity-specific multi-manager platform. This multi-manager approach produces superior risk/ return ratio versus more diversified funds of hedge funds. It provides access to talented managers, some of whom are not otherwise available, that are able to profit from the inefficiencies in the various commodity sectors regardless of direction. Long/ short commodities are one of the few areas which remains highly underinvested by institutions and offers a sustainable source of alpha with little correlation to other assets.

Commodities are attractive for a variety of reasons, the most important of which is the lack of correlation that the sector has to other strategies, especially when commodity-related equities are excluded from the portfolio in order to express a more pure view of the asset class. In fact, investors have been reallocating from other buckets, particularly “no yield” fixed income, into commodities for both correlation and returns. There is much evidence of the hedging attributes commodities provide to portfolios in dealing with inflation, geo-political risk, and changes in business cycles; indeed multimanagers should be screened to ensure very low or negative correlation when conducting a search. This simple correlation matrix highlights the lack of correlation exhibited by commodities managers to broader markets and other hedge fund strategies.

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