Institutional investors

Commodities Futures Returns: Reconciling history with expectations September 2010 Leola Ross Senior Investment Strategist Collateralized commodities futures (CCFs), as defined by the Dow Jones–UBS Commodity Index, exhibited a historical annualized return of 3.12% over cash for the 1991 through 2009 sample period. This paper examines whether or not there is a logical reason for this return and outlines: How past attempts to explain the returns of CCFs centered on the idea that "someone gets paid" for taking on another party's risk, Erb and Harvey's (2006, 69–97) demonstration that rebalancing a collection of lowly correlated risky assets—even if those risky assets have no expected positive returns of their own—can produce a positive return for the Investor, New analysis on CCFs to fit the structure of the Dow Jones—UBS Commodity Index. Why assuming monthly rebalancing and, in general, using monthly data are both suitable to the index and preferable to working with annual data. Request this research A note about our research Our proprietary research is made available to our institutional clients, and many of these published papers are available to other institutional investors as well. If you are not a Russell client, but are an institutional investor, we welcome you to request this research piece. We only require your contact information on a short request form. For more information about our research, please contact David or Gerry:     West Coast David Rothenberg Managing Director 866-926-5934 East Coast Gerry Lillis Director 866-459-4128 Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Commodity futures and forward contract prices are highly volatile. Trading is conducted with low margin deposits which creates the potential for high leverage. Commodity strategies contain certain risks that prospective investors should evaluate and understand prior to making a decision to invest. Investments in commodities may be affected by overall market movements, and other factors such as weather, exchange rates, and international economic and political developments. Other risks may include, but are not limited to; interest rate risk, counter party risk, liquidity risk and leverage risk. Potential investors should have a thorough understanding of these risks prior to making a decision to invest in these strategies. Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company. Date of first use: September 2010 USI-7762-09-12			Printer friendly version of this page