Hedge Hunting the Polar Bear: The Tactical and Strategic Value of Commodity Futures on Nordic Markets

Abstract: Despite the fact that commodity futures have been trading for hundreds of years, it is only recently that the debate has begun about including these assets in conventional portfolios. Much of the attraction of commodities emerges from their potential to produce equity-like returns while having low or even negative correlation with equities and bonds, thus providing considerable diversification benefits. This thesis demystifies the unexplored strategic and tactical opportunities that commodity futures present to investors on the Nordic markets. On the basis of the facts we produce, the historical performance of investments in commodity futures puts forward an attractive asset class to diversify traditional portfolios of stocks and bonds. We find a positive correlation between commodity futures and inflation which has important implications for long term asset management, where the aim is not only to generate a positive return, but also to protect the assets from decline in real terms. Interestingly and in contrast to previous research, we find evidence of a small but positive correlation between Scandinavian stock markets and commodity futures. The higher correlation may be a reflection of a higher commodity dependency in these markets. Conclusively, the thesis sheds light on the risk-return characteristics of adding commodity futures to an investment portfolio. 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 the hedge hunting investor in terms of diversification benefits and the associated increase in risk adjusted returns.