An Empirical Examination of the Performance of Commodity Mutual Funds

Abstract

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.

TOPICS: Commodities, mutual funds/passive investing/indexing, performance measurement