8.1 - COMMODITIES AS AN INFLATION HEDGE

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1 8 - CONCLUSIONS Commodities as an asset class has gone from relative darkness and have come into the limelight in recent times. There are two main reasons for increased focus on commodities; firstly, we have seen a bull market in commodities and that has attracted the attention of investors. Secondly, past studies and literature have unanimously shown that commodities have a low correlation with stocks and bonds, making it an attractive portfolio component. The price of commodities is a function of demand, which has increased due to the rising economic activity in many emerging markets such as China, India and Latin America, and supply, which often is limited and difficult to adjust in the short run. Over the years, investors became more active on the commodity market as a result of passive indices and the findings of researches. Small changes in production output may have great marginal effects on price, thereof the disreputable volatility of commodities (Akey, 2005). Higher prices of commodities resulted that food companies had to increase their product prices or had to accept lower margins (Wolzak, 2010). Prices of gold and oil for example have broken price records. Currently the price of gold is still going up, while the price of oil is descending as a result of using tactical oil reserves (Verheggen, 2011). Moreover, considerable research has been done regarding the reasons for investing in commodities and how to gain exposure to the commodity sector. However, there has been little research regarding the optimal size of an allocation to commodities. Historically, Ibbotson 2006 found that commodities have provided high returns, diversification, a hedge against inflation and an improved risk/return profile in strategic asset allocation. Our thesis have given more or less similar results, but not as robust as the result of past studies. We have found positive correlation instead of negative and zero correlation between stock and commodities. Also, the inflation hedging properties of commodity in Indian markets is significant only with Comdex and Energy. And, it s very amazing to find out negative correlation with inflation and Agri which was expected to be positive. But the important conclusion is that this study shows the advantage of including commodities in strategic asset allocation. 151

2 The contradiction is, however, that though in itself being a relatively risky asset, commodities may reduce the overall risk of a portfolio due to its relatively low correlation to traditional asset classes like stocks and bonds. Empirical studies have concluded that passive commodity futures indexes show not only good stand-alone performance but also substantial portfolio diversification benefits (Abanomey and Mathur [2001], Ankrim and Hensel [1993], Anson [1999], Becker and Finnerty [1994], Georgiev [2001], Gorton and Rouwenhorst [2004], Kaplan and Lummer [1998], Johnson and Jensen [2001], and Jensen, Johnson and Mercer [2002]). These studies are done using Markowitz s mean-variance theory, and conclude that adding commodity futures into the portfolio should improve the portfolio performance by reducing the total risk without sacrificing expected return. Moreover, commodities have been suggested as a hedge against inflation, i.e. having a positive correlation. The primary purpose of this thesis is to examine commodity futures and its characteristics from an Indian perspective and to investigate whether the potential benefits of commodity futures investments suggested by previous research is applicable in this part of the world as most of these studies are done in U.S. This study takes the perspective of an Indian investor, with significant exposure to its local stock and commodity market and whose returns will ultimately be measured in the local currency. The objective of this work was to explain the investment possibilities in the commodity markets, and to examine whether commodities as an asset class are able to contribute to enhance of the risk-return-ratio of a portfolio. This study has managed to create optimal portfolios for investors with known and unknown risk preferences and conclude that our investment strategy have been efficient and profitable if look forward to see the portfolio diversification effect of these low-correlated commodities. Commodities futures had sources of risk and return that were distinct from traditional assets such as stocks and bonds, making commodity futures an effective portfolio diversifier. The analysis of diversification benefits of investing in commodities over the period of our study i.e. June Dec 2011 has shown that expanding the investable universe with commodities improves the risk/return trade-off of optimal portfolios for any given risk tolerance coefficient. 152

3 Therefore it can be said that adding commodities to a portfolio of stocks increases the Sharpe ratio of optimal portfolios. These conclusions are in line with other findings in international literature. The goal of this thesis was to examine the impact of adding commodities to a traditional financial portfolio and determine which one adds the most value to the risk-return relation of a financial portfolio. In order to realize this goal we examined the equity sector (Nifty) and MCX commodity futures indices as asset class in the India. Previous researches have shown that alternative asset classes have been used to enhance the risk-return characteristics of a portfolio. The search for high return always was, and still is, the main theme for investors. In order to gain higher yields in a more globalized market, investors started to search beyond the area of the traditional stock and bond markets. This opened the door to alternative investments such as precious metals, energy, and Agriculture etc. in short we can call it commodities, which have several attractive characteristics as we have seen in this thesis. Based on the general evidence from the data, we find that commodity serves as an investment asset with positive expected returns for institutional investors that may also function as a hedge against inflation. This study has explained the modern portfolio theory which formed the basic framework of this thesis. Furthermore, topics such as portfolio theory, benefits of traditional and new alternative assets, inflation hedging benefits using alternative investments, and using commodities as a portfolio investment were discussed. And our findings are more or less in line with the international literature and thus, it can be concluded that if commodity indices trading is started in India then it will give way to a new asset class in Indian scenario. Commodities have relatively high returns which make them interesting to consider in the traditional portfolio. Of course, the study not only considers the returns but also the associated risk. In addition to this, the relationship between the various asset classes was positive. Furthermore, the excess return per unit of risk was calculated by the 153

4 Sharpe ratio, which showed that commodities provide the most return for their risk in comparison with the remaining asset classes. In order to assess the impact of adding commodities the efficient frontiers were constructed and optimal risky portfolio and optimal complete portfolio were constructed which shows that adding commodities to the traditional all equity portfolio had a positive influence on the efficient frontier. The results are of course to some extent data dependent and may not apply in all circumstances. This thesis provides more evidence for the desirability of including commodities in portfolios. This study provides alternative ways to examine diversification benefits and risk-return results by employing the mean-variance optimization model. Moreover, the Sharpe ratios of the tangent optimal portfolios which lie on CAL are larger than those of the traditional benchmark portfolios. Lastly as given by Eling (2007) different conclusion can be attributed to the use of different databases, sample periods, performance measures, and statistical methodologies. Finally from this empirical research we are able to draw the following end conclusion of the study; which is that that compare to the previous studies done to investigate the role of commodities under the mean-variance (MV) static asset allocation setting, we have found commodities is having diversification benefits in Indian markets. Even though not as much benefit as provided by GSCI and DJAIJ in US, there is scope of further development in Indian commodities markets as the investors need to gain more confidence in the markets and get more knowledge in the market. Also, the rules and regulations of commodity market are not as transparent as equity and Indian commodity markets require a strong regulatory body like SEBI for protection of investors, which can lead to excellent development in the commodities market that can benefit hedgers and speculators alike. This can lead to opening of a complete new investment avenue and give the investor a new asset class to invest in COMMODITIES AS AN INFLATION HEDGE Researchers like Kurov (2009) and Kat & Oomen (2006) discovered that commodities and unexpected inflation are positively correlated and thus by investing in commodities 154

5 investors are safe guarded against inflation. But the findings of this thesis give mixed result for the correlation between inflation and commodities. The correlation between unexpected inflation and commodities is positive, more precisely the correlation of inflation with Nifty and Agri is negative and Comdex, Metal and Energy is positive, also but it is not statistically significant and the positive correlation is less than what has been found in the literature. Also, this study is based on monthly data and mostly literature that found a positive correlation between inflation and the return of commodities used annual data. Therefore it is reasonable to assume that inflation has a positive correlation with commodities if the annual data is taken, but this research we have not annualized the data as minimum time period of more than 10 years is necessary for getting strong conclusion. The fact that the correlation is not significant can be explained by having not enough annual data. However positive correlation between commodity futures and inflation implies that commodity futures work as a hedge against inflation, i.e. when inflation goes up, so does the return of your commodity futures, hence protecting your purchasing power. This has very important implications for long term asset management, where the purpose is not only to generate positive returns, but also to protect the assets from decline in value in real terms. By adding commodity futures to the portfolio an investor is better safeguarded from inflation than if only holding stocks and bonds. On this point the findings in this study are in line with most previous research, e.g. Gorton and Rouwenhorst (2005), Erb and Harvey (2006) and Kat and Oomen (2007), but this study is distinguished in a manner that the positive correlation found with inflation and commodity is less compared to other studies and it is also statistically not significant. Thus, commodity futures perform better in periods of unexpected inflation, when stock and bond returns generally disappoint. Further, it can be concluded that it s not unreasonable to assume that commodity futures is especially valuable to investors who tend to affix high probability to rising inflation and interest rates and who want to hedge their stock and bond positions against such changes. Thus it is recommended that portfolio managers should incorporate commodities into a portfolio if they seek a hedge against inflation and interest rates. 155

6 8.2 - COMMODITY AS DIVERSIFYING AGENTS Researchers have discovered a negative correlation between the return of commodities and equity (Bodie & Rosansky, 1980; Gorton & Rouwenhorst, 2006). Literatures are assuming that there is a negative correlation between equity and commodities. In contrast to previous studies, e.g. Gorton and Rouwenhorst (2005) and Kat and Oomen (2007), who find a zero or negative correlation between commodity futures and stocks, in this study there is evidence of a positive correlation between Indian stock markets and commodity futures. The correlation is still relatively low, and its statistically insignificant and thus we can conclude that commodity futures can be considered to give diversification advantage to a stock portfolio. Further this research gives the results that in line with previous studies, e.g. Erb and Harvey (2006), that commodity futures yield equity like returns, i.e. the risk and return of commodity futures is comparable to those of stocks. The study shows the diversification benefits of commodity futures in an investment portfolio. By constructing four portfolios (i.e. combining Nifty with MCX indices), with its own set of asset allocation restrictions, and optimizing the asset allocation to minimize risk per any given level of return, it is clear that the portfolio including commodities always dominate the corresponding portfolio without commodities. Further, it can be said that in spite of not being a perfect hedge with zero or negative correlation with stocks and bonds, commodity futures still have a lot to offer to the strategic investors in terms of diversification benefits and the associated increase in risk adjusted returns. The research sheds light on the risk-return characteristics of adding commodity futures to an investment portfolio in Indian scenario. On the basis of the facts, the historical performance of investments in commodity futures suggests that they are an attractive asset class for the hedge hunting investors whose main aim is to diversify traditional investment portfolios of stocks and bonds. An interesting question that has emerged out of these findings is how to explain the higher correlation between commodity futures and stocks in Indian markets, compared to for example the United States, where the majority of all commodity futures related 156

7 research has been performed. One can say that the higher correlation may be a reflection of a higher commodity dependency in these markets. Indian commodity market prices and demand and supply all have an important impact on the economy and also ultimately the stock markets, hence a higher correlation is reasonable. An example which comes in mind is that in India high oil prices tend to stimulate not only the oil producing companies, but the entire off-shore and oil services industry as well as shipping and other related businesses, ultimately affecting the entire economy. To conclude, commodity futures returns have a good potential to provide diversification benefits in both stock and bond portfolios. The correlation is positive but not statistically significant and it may change over different time horizons. This study has attempted to examine empirically whether commodity future can be considered as a unique diversifying agent to the equity portfolio. The study considered monthly closing values of Nifty as the proxy for equity portfolio and MCX COMDEX, MCX Metal, MCX Energy, MCX Agriculture representing the commodity future markets, which is spanning from June 2005 to December The empirical finding of the study in the context of commodity future role in strategic asset allocation and as a diversifying agent to the equity portfolio is twofold. First, it was observed that by adding commodity futures to a portfolio of equities enhance the risk adjusted return of a portfolio. Secondly optimum allocation in commodity was found out to be in range of 43% to 94% in an optimal all risky portfolio. The study also found that MCX Energy futures do not add any diversification benefit to the portfolio of equities whereas MCX Agri futures are found to be the best diversifying agents. While conducting this study, there was severe limitation of the data availability, especially data in the commodity futures market. In the descriptive statistics we found that the metal has been an excellent performer with highest return and low return and it completely dominates over Nifty. The highest Sharpe ratio of % is achieved by the optimal portfolio of Nifty and Metal. The results were not at all disappointing and we can achieve diversification benefit from combining stock and commodity portfolio in India and it is very good news for the investors. 157

8 The commodity futures data is available only from June 2005 onwards and therefore; the conclusions drawn on the basis of limited historical data may not be generalized and may be biased. Further, the conclusions may hold true in future only if the macroand micro-economic conditions and drivers that influenced the historical data continue to exist in future as well. Lastly, the statement that commodities have outperformed other investment options in the past is a comprehensive one and highly dependent on the time period of the analysis. Lastly, we know that empirical data supports findings in the international literature that commodity futures enhanced risk-adjusted portfolio returns and provided effective hedge against rising inflation and there could be significant benefits from investing in commodity futures and this study gives the conclusion that institutional and retail asset managers should consider commodity futures as a strategic asset class in Indian scenario OPTIMAL SIZE OF AN ALLOCATION TO COMMODITIES Ibbotson 2006 had concluded that at the 10% standard deviation level a moderate risk level similar to a standard portfolio of 60% stocks and 40% bonds the optimal allocation to commodities ranged from about 22%. Even at the conservative 5% risk level, optimal allocations to commodities were relatively large, ranging from about 9% up to nearly 14%. In this research the optimal allocation to commodities range from 43% to 94%, metal is having such enormous allocation of 94% in the optimal portfolio as it is having the highest Sharpe ratio and also low correlation with Nifty. If the investor wants minimum variance portfolio then also they can allocate 51% to 62.5% to commodities to receive best return to the extent of 1.09% to 1.53%. Lastly in lines with Ibbotson 2006 this research concludes that commodities have provided high returns, diversification, a hedge against inflation and an improved risk/return profile in strategic asset allocation. Also, an investor must remember that 158

9 past performance is not necessarily indicative of future results. Futures and options trading involve substantial risk of loss and are not suitable for all investors SUGGESTIONS First of all one important suggestion is that Indian markets should not be deprived of index investment in commodities. It is an excellent tool for diversification and investor s confidence in commodity market will increase if trading in commodity index futures are introduced in India. An optimally diversified portfolio should be one that is invested across as many asset classes and markets as possible. If the commodity derivatives products offer risk and return trade-offs that cannot be easily replicated through other investment alternatives, or provide risk diversification opportunities for investors in other market segments, then it can be expected that the investment in commodity derivatives markets will benefit the institutional investors who are up till now prohibited from operating in these markets. The particular benefits of including commodity futures in an otherwise well-diversified portfolio vary (Fortenberry and Hauser, 1990; Becker and Finnerty, 1997), but in the long-run they tend to improve its financial performance (Bodie and Rosansky, 1980; Jensen et al., 2000). A Recent study by Gorton and Rowenhorst 2005 has shown benefits of commodity futures investment in US markets after which investors got lot of confidence in the market. India, needs such kind of study to be done by firms like E&Y, KPMG, Merill Lynch, Lehman bros. etc. As a whole research team is required to prepare a comprehensive report which cover Indian commodity futures markets and its diversification benefits. It can be said that a commodity investment in isolation will be as volatile as equities. If you think equities are volatile, then yes, commodities are volatile-in isolation. But I'll emphasize that commodities should be viewed not in isolation, but based on their impact on your overall portfolio. From a portfolio perspective, it is believed that commodities have a strategic role to play, and investors need to be thinking strategically in deciding to implement them. They might be concerned tactically about 159

10 how much to implement, but the key decision is to think about a longer time frame. We can therefore recommend to investors that they view commodities not as a tactical allocation, based on an expectation that commodities will go up or down, but rather that they view it as a strategic allocation with the acknowledgment that they're not sure that commodities, or stocks or bonds will go up or down. Once we recognize the inability to accurately predict with certainty the returns of any asset class in any portfolio, it forces one to the conclusion that one should diversify (Bekkers Niels, Ronald Q. and Trevin W., 2009). And historically commodities have provided very strong diversification from stocks and bonds. It's easy for investors to look at what's happened in commodities in the last six months and say, "I want commodities because they're going up in price," or look at what's happened in the last week and say "Oooh, I don't want commodities because they're going down in price." The lesson to investors is "invest for the right reason"-and the right reason is diversification, not because in the short term you think they're going up or down. That's not a good reason to invest in commodities. Commodities are to be considered as an asset class approach. So much of the work on commodities has been looking at long-only strategies, and that generally is the way the asset class is described. For someone who offers a long-short strategy, you might ask them, "If you pick up the newspaper six months from now and read that the price of steel has gone up, can you assure me that that will be good for my portfolio?" If someone truly has a long/short strategy, then they might not know that they'll always have a positive exposure to steel, and in that case, they've lost exposure to the asset class of commodities. Further, we suggest that if one considers macro-economic point of view then time to invest in commodities shall be in phases with a high expected and unexpected inflation rate. Also, the time to invest in commodities is during times of low inventories and when their futures curves are in backwardation, but this can be valid for the long-only strategy, typical for most commodity funds. Taking into consideration the current macro-economic scenario and effects of factors such as the continued growth of the 160

11 global economy, a constant demand for commodities from Asia, China, and other developing economies; the US dollar depreciation and resulting rising interest rates during the recent months in the USA as well as in the EU, the strengthening of the monetary policy, government budget deficit, the energy shortage and business cycle phases, it can be reasonably assumed that commodities can offer benefit opportunities for the next years. In recent years, investable commodity indices and commodity linked assets have increased the number of available commodity-based products. For the next years two further developments in the commodity market are expected specially introduction of MCX futures indices trading can be the next step in developing the commodity markets in India. There can be an improvement of the future contracts liquidity because of their increasing usage among producers forced to hedge their products against commodity price changes. Lastly, we will be seeing growing popularity of commodities amongst institutional asset managers, because of excess capital which has to be invested. As we have seen that commodity derivatives play a crucial role in the price-risk management process especially in any Agricultural surplus country. And unique hedging instruments derivatives such as forwards, futures, swaps, options and exotic derivative products are extensively used in the global market. However, Indian market is limited to commodity futures only. Therefore, suggestion is to review of the nature of institutional and policy level constraints faced by this segments and include more focused and practical approach from government, the regulator and the exchanges for making the commodity futures markets a vibrant segment of risk management like equity and bond markets, which can play an important role in Indian economy RECOMMENDATIONS FOR FURTHER RESEARCH In the process of choosing the optimal portfolio determining aggregate risk, the variance and correlation structures across assets are extremely important. It goes beyond the scope of this thesis to fully explain the causes of risk and to elaborate on the changes in valuations of specific risks which aggregate in portfolio theory. Modern Portfolio Theory (MPT) is the framework choosen when assigned to determine the 161

12 optimal asset allocation portfolio limited by stocks and bonds, and are only able to take long positions, they start with they choose for optimizing a selection of stocks and bonds and from there they develop their strategies. Only some are capable of making the models estimated variance time-variant by using Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) series, as the computational complexity of the model and time constraint of the soon starts to limit the opportunities and only the most sophisticated future portfolio managers succeed in progressing from there. Thus, this research can be further extended to incorporate GARCH framework. This research has shown that direct commodity investment or investments in commodity futures can provide significant portfolio diversification benefits beyond those achievable from commodity-based stock and bond investment. These benefits stem from the unique relationship of commodities to market forces such as unexpected inflation. It is sometimes believed that investing in the stocks of commodity producing companies is a good way to gain exposure to commodities. It has even been argued that the stocks of such companies are a substitute for commodity futures. That could be studied in detail in Indian scenario. As previous studies have found that there was a relatively low correlation between stocks from a particular sector and the corresponding commodities index; those research, used GSCI and Dow Jones AIG indices as proxies for the commodities markets since they are the two most traded and widely used indices. But, these are not the only descriptions of the aggregate performance of commodities markets, and it would be interesting to further involved and bring more indices into attention. Further research in India using commodity related stocks can be done. Further studied of effect of the parameters, skewness and kurtosis for different time series data can be made and one can try to figure it out which data series is better to construct a portfolio and how these extra parameters can make us better informed in our investments. A portfolio based on indices is a simple representation of the real world. For future research it may be interesting to see how each sector/market behaves during a 162

13 recession, because the impact of a recession is not always immediately visible. This, research did not focus on the use of a specific strategy. Some literature states that the Momentum Strategy is very useful for an asset such as commodities. So, it may be interesting to take a closer look at which strategy would be the most effective during a recession or a period of economic growth. Basistha & Kurov (2008) split the business cycle into two stages: recession and economic growth (expansion). So, it may be interesting to take a closer look at which strategy would be the most effective during a recession or a period of economic growth. correlations may vary somewhat over the different phases of the business cycle, suggesting that not all commodities make equally good diversifiers at all times this aspect can be studied in detail, but to do that we need a longer history for the markets. According to most literature the correlation between equity and commodities is negative but based on new insights the correlation is not always negative but fluctuates over time. Future research can go deeper why the correlation between equity and commodities is not always negative. After proposal of Mean-Variance theory, the question about suitability of variance as a risk parameter was raised (e.g. Markowitz [1991], Campbell et al. [2001]). Since variance is symmetrical, it does not consider the direction of the price movement. Thus, optimizing the variance can prevent us from losses in same manner as from gains. Moreover, Roll [1977, 1978, and 1979] firstly pointed out other weaknesses of the theory. This evidence forced academics to search for more appropriate risk measures. For instance, Markowitz [1991], Fishburn [1977], Bawa [1977] proposed mean-lower partial moment approach, Yitzhaki [1984] proposed mean-gini portfolio selection model, Konno and Yamazaki [1991] proposed Mean- Absolute Deviation (MAD) approach, Uryasev [2000]. Mean-VaR (Mean-CVaR) type models, etc. has been developed. But, a recent study by Engilbjört Auðunsdóttir (2011) it is concluded that despite its flaws the theory is still the only properly formed and implemented theory for portfolio construction. 163

14 Literature has also established that Markowitz model results are robust to a different Mean-Variance optimization model as Leyuan & Daigler 2010 have compared the Markowitz results to the Sharpe optimization model results and found that the two models generate almost identical ex-ante risk-return efficient frontiers, with the Markowitz results slightly dominating the Sharpe results. The initial quantitative development that distinguished finance from economics was Markowitz s model to determine an optimal risk-return portfolio. Later studies modify Markowitz s model to include dynamic and asymmetric risk measures; however, the performance of these enhancements are indistinguishable from the original Markowitz model (Moreno, Marco and Olmeda, 2005). Lastly, the recommendations for further research are closely linked to the assumptions and limitations of this research. One recommendation is to perform a more thorough analysis of the distribution of the data. As mentioned before, it is widely known that financial data in general is not normally distributed. It has been assumed that the variance of the errors is constant; this is known as the assumption of homoskedasticity. If the errors do not have a constant variance, they are said to be heteroskedastic. It is also possible that the variance of the errors changes over time rather than systematically with one of the explanatory variables; this phenomenon is known as autoregressive conditional heteroskedasticity (ARCH). There are a number of formal statistical tests for heteroskedasticity and one could for example use White s (1980) general test for heteroskedasticity. Further, Akey (2005) argued that a passive investment in a long-only commodity index (such as the DJ-AIGCI) may not provide the best means to access commodities. An actively managed commodity futures strategy is likely to provide superior returns given that commodity markets face certain idiosyncrasies that are unique relative to other financial markets. Further research into active strategies which can be used to exploit different conditions in the commodities market and such tactical strategic allocation is likely to add value. 164

15 Even though our data sample is extensive, studying an even longer time period would pave the way to identify changes in the pattern of return, volatility and correlation over time. Also, past researchers have paid little attention to including levered commodity futures in the portfolio optimization problem. Only Becker and Finnerty (1997) attempt to incorporate futures leverage into the analysis by constructing levered indices, which scale futures returns by a multiplier. Further research is required in this area as well. Further research which incorporates individual futures contract instead of an index exposure has been extensively done in the many countries, this can be extended to Indian markets and lastly, we see that the distribution has some degree of skewness to the right. Further study can be done with this regard as an investor you don t want to ignore any potential losses. There do exist other risk measurements that takes this kind of noise into consideration such as semi-variance, Modified Value at Risk and downside risk, one can look further into any of these other risk measurements. THE CHALLENGE OF STRATEGIC ASSET ALLOCATION The practical implementation of strategic asset allocation is certainly not easy. To form a long-term portfolio, investors must first think systematically about their preferences and about the constraints they face. In my talk today I have assumed the particularly simple constraint that financial wealth supports consumption, but many investors must also take into account labor income or fixed expenses. Second, investors must form beliefs about the future not just about average asset returns and risks, but about the dynamic processes that determine interest rates and risk premia. These beliefs must be consistent with some reasonable view about the equilibrium of the economy. Third, investors must solve the intertemporal optimization problem that they have set up. Last but not least, they must carry out their strategic plan without succumbing to the psychological biases documented by behavioral finance economists. It is hardly realistic to expect individuals to do all this by themselves. One of the most interesting challenges of the 21st Century will be to develop systems that could combine the scientific knowledge of financial economists with information technology and the human wisdom of financial planners, to help investors carry out the task of strategic asset allocation. 165

16 Ibbotson 2006 had concluded that despite considerable academic research, no definite conclusions regarding the role of commodities in a strategic asset allocation exist. Possible reasons identified were that commodities are excluded from the opportunity set cause it has limited number of implementation vehicles, the major commodity indices have short histories that have been backfilled, ambiguity over what constitutes an asset class and an investment strategy, the role of commodities in the market portfolio is undefined, the lack of an accepted commodity pricing model, and the lack of an understanding of the inherent returns of commodities. 166