Public Commodity Funds

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Public Commodity Funds

For an investor, public commodity funds constitute an indirect investment in commodity futures. Investors can purchase shares of public commodity funds, which is similar to purchasing shares of mutual funds except that commodity funds buy and sell commodity futures instead of stocks and bonds.

On the one hand, public commodity funds offer an opportunity for even small investors to participate easily in commodity markets since public commodity funds typically have low investment requirements and manage the rolling of the futures.

On the other hand, the exposure to commodities is lower than in the case of holding long positions in commodity futures directly. Public commodity funds can also hold other financial instruments such as currencies and currency futures, financial futures, stocks of natural resource companies, etc.

In addition, they can be long or short in commodity futures; thus, the inflation hedge property inherent to most commodity futures is not necessarily incorporated in commodity funds and the correlation to commodity futures is on average insignificant.

Performance studies show that public commodity funds rely primarily on technical analysis and not on fundamental supply and demand factors, generally impose high management and incentive fees, and exhibit high volatility.

Furthermore, investors are generally only allowed to liquidate their fund shares at the last day of the month. Despite these drawbacks, several public commodity funds have been found to be advantageous both as stand-alone investments and as assets in traditional portfolios.