Commodity Futures Investing from a Swedish Pension Fund Perspective

Abstract: Our study examines if the Swedish General Pension funds (AP-funds) could benefit from investing in commodity futures derivatives, which they are currently prohibited from. The effect of adding commodity futures to the holdings of the AP-funds is examined during the period 2001 to 2015, with extended analyses on accumulated bull and bear periods. We conduct an introductory descriptive analysis of time-varying correlation between the respective asset classes in the AP-funds’ portfolio and commodity futures. However, our primary analysis is based on two portfolio efficiency tests from adding commodity futures, the intersection and mean-variance spanning framework of Kan and Zhou (2012). The results imply that the AP-funds have potential in risk reduction by extending their portfolio with commodity futures indices with regards to their asset mix. However, the test of a replicated AP-fund portfolio shows that their specific allocations inhibit diversification benefits as performance is only improved in bull periods when considering portfolio weights. Furthermore, because of an observed difference in diversification benefits in bull and bear periods, a tactical allocation strategy for the AP-funds, linked to the movements in the equity market, is advocated, where commodities can function as an actively managed risk instrument.