We analyze the benefits accruing to a risk averse investor of adding commodity futures to her portfolio of traditional assets using an out-of-sample framework that efficiently incorporates the information contained in commodity characteristics. We identify the futures carry as a key characteristic for tactical allocation among commodities. Adding futures to the traditional portfolio by conditioning on the carry leads to a significant increase in the Sharpe ratio of 427%, without an adverse impact on the distribution of portfolio returns. Indeed, a stochastic dominance methodology, which explicitly takes into account the investor’s aversion towards negative skewness, indicates that the investor would strictly prefer the commodity futures carry augmented portfolio over the benchmark (stocks and bonds only) portfolio.



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