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Grain Rallies Offer Portfolio Diversification
The Spanish economy is failing, stocks are down and banks are being downgraded. Is there any silver lining on today’s economic times? Well, yes, but it is coming from an unexpected source.
Corn, soybeans and wheat have staged a remarkable rally over the last two days, with some delivery months rising their maximum allowable amount (called a “limit up” move). These gains can be primarily attributed to the recent weather in the Midwest, as high temperatures and dry conditions weaken crops. In what was a potential record-breaking grain yield year, U.S. farmers are now facing a potential shortfall in yield, which should cause prices to rise if demand stays constant.
This reminds us of Markowitz’ principles of diversification—spreading investments throughout a variety of assets to reduce risk. Although most investors cannot gain access to agricultural markets as easily as they can equities or fixed income, there are some alternatives. Managed futures mutual funds, for example, allow advisors to add a non-correlating investment to a traditional portfolio. Such funds performed well during last month’s stock deluge and are holding up so far in June.
Grain prices are expecting to increase, as continued drought and heat is probable throughout the Midwest for the next month.
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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