Commodities tend to bear a low to negative correlation to traditional asset classes like stocks and bonds and thus are treated as a source of diversification. In Ibbotson Associates (2006), the paper discussed how commodities have been the best performing asset class between 1970-2004 and that it had one of the lowest average correlations between other assets such as bonds, equities and treasury. The correlation observed was in fact negligible and very close to zero. In addition, the paper by Erb and Harvey (2006) had also revealed that commodity futures are not sensitive to traditional systematic risk, making them a good addition to your portfolio to complement other traditional assets such as stocks and bonds. While combating the high inflationary pressures that we face in the world today, preservation of wealth or achieving positive real returns is the utmost important objective at the back of all our minds. The study by Bodie and Rosansky (1980) and Gorton and Rouwenhorst (2006) had also found evidence to suggest that commodity futures indices are a good hedge against both inflation and unexpected inflation, which neither stocks nor bonds has such properties.

By capitalising on the benefits that commodities asset class brings to a multi asset portfolio, much research had been carried out to determine that a long-short portfolio is superior to a long only portfolio. Looking at out of the sample performance of optimally diversified portfolios by Daskalaki and Skiadopoulos (2011) which compared long only fully-collaterised positions in commodity markets and long positions in traditional asset markets, results also showed that the Sharpe ratios are considerably greater for bonds and stocks than for commodities long only portfolio, suggesting that long only commodities portfolio may not bring out the best in what commodities as an asset class can offer. In fact,