Investing in commodities

Policies of asset allocation have changed substantially in the last decade and many asset managers have varied their choices of asset classes within a portfolio: Research shows that commodity futures returns often exibit a negative correlation with equity markets.In recent years, two major changes have taken place in commodity markets. First, world demand for commodities has been sustained due to large variations in the price of some commodities. Historically, the real prices of crude oil and equities have increased in tandem only during episodes of growth in world demand for industrial commodities. Second, financial institrutions have sharply increased their share of open interest in commodity futures markets. THis chapter examines commodities as a financial asset and reviews the recent literature on the correlation between commodities and traditional asset classes with a view on how to select a portfolio.