In the past, commodities as an investment were considered a good way to diversify your portfolio. Those days are quickly leaving us as commodities are now considered a great way to generate real returns, and not just a hedge against losses or way to add balance to an investment portfolio.
One of the ways institutional investors are going about doing that is simply in trading commodities more actively. With the commodity bull market poised to resume, a large number of institutional investors say they're going to increase their commodity holdings over the next year.
A recent survey discovered that investors, like mentioned, aren't looking simply for diversification of portfolios at this time, but are looking for absolute returns. That's a lot different than what they were seeking last year with their commodity investments, which also included commodities investment as a hedge against inflation, which is still true, but no longer the key element in commodity investment decisions.
Another trend seems to be away from commodity index funds into direct investment in commodities, as well as investment in a variety of commodity exchange-traded funds. Many commodity investors are looking for more active positions rather than holding positions going forward.
The potential fallout for commodity prices is there could be a lot more volatility in the commodities market from managed commodity positions than from holding patterns associated with commodity index funds. That may also result in commodity prices having more downward pressure as well.
Estimates are that commodity assets under management at the end of 2009 could be as high as $240 billion.
Most of those that invest and follow commodities continue to believe that we're still in the midst of a commodity bull market and commodity prices overall will continue to rise.
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