Commodities can be a great way to diversify portfolios and hedge inflation risk, but their volatility can rattle clients into avoiding them.
There’s a way to get the benefits of commodity exposure in a risk-managed fashion, says Neil Simons, managing director at Northwater Capital Management.
“A ‘risk parity’ approach to portfolio construction…aims to match the volatility of each component of a portfolio rather than dollar allocations. Applied to commodities, this results in improved diversification across commodity sectors and individual commodities.
“A portfolio constructed using these concepts avoids the concentration risk inherent in commodity indices—a good thing given the rollercoaster ride that oil has been on recently.”
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