Financialization And Commodities

Slightly more than a decade ago, several studies were published raising the possibility that an allocation to commodities (in the shape of fully collateralized futures) could improve the efficiency of a portfolio due to the diversification benefit (the low to negative correlation of commodities to both stocks and nominal bonds) provided through including this asset class.

The publication of these papers was closely followed by a dramatic increase in the demand for commodity investments, and Wall Street responded by creating a host of new alternative investment vehicles. Between 2004 and 2008 alone, it’s estimated that at least $100 billion moved into commodity futures. This increase in investor demand has led to what’s been called the “financialization” of commodities markets. As is always the case, an increase in demand impacts prices and expected returns.

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