Credit Suisse’s Total Commodity Return Strategy team today announced the release of a new white paper entitled, “How Commodities Can Help Investors Face the Uncertainty of the Inflation/Deflation Debate.”
In the wake of the 2007–2009 global financial crisis there have been heated debates over which is the greater macroeconomic risk facing the world’s developed economy: inflation or deflation. The lack of consensus on the outlook for inflation presents a challenge to investors on how to prepare for unexpected shifts in the global inflationary environment.
The new white paper explains how incorporating commodities into an overall portfolio allocation can act as a hedge against inflation, and more importantly, against unexpected inflation. Some of the key findings included in the report are:
- Uncertainty increases the risk that any rise in inflation will be “unexpected” (i.e., it will not be properly priced into market valuations); exposure to real assets such as commodities could help investors address this challenge;
- Commodities are most effective at hedging unexpected inflation as expected changes to inflation are generally already factored into security prices;
- Unlike other investments, such as TIPS, commodities may also provide important diversification benefits which may help improve an investor’s overall risk/return profile. Diversification is typically best achieved using a broad basket of commodities to smooth out the volatility of individual commodities, such as oil or gold;
- Regardless of the results of the inflation/deflation debate, the outcome will undoubtedly be “unexpected” which supports the argument that commodities can help hedge a diversified portfolio against changing inflation conditions.
About the Credit Suisse Total Commodity Return Strategy
Credit Suisse’s Total Commodity Return Strategy has been managed for fourteen years and seeks to outperform the return of a commodities index, such as the Dow Jones–UBS Commodity Index Total Return or the S&P GSCI Total Return Index, using a quantitative commodity research process. Commodity index total returns are achieved through:
- Spot Return: price return on specified commodity futures contracts;
- Roll Yield: impact due to migration of futures positions from near to far contracts; and
- Collateral Yield: return earned on collateral for the futures.
As of November 30, 2010 the team managed approximately USD 7.1 billion in assets globally.
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