Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
As global market volatility continues, it remains increasingly important that institutional investors aim to reduce volatility through diversification. Investors of diversified portfolios are continually looking for uncorrelated investments in an attempt to reduce unsystematic risk and improve the risk/return profile of the total portfolio. Many investors have looked to the alternative asset classes as a way to provide this sought-after diversification. Alternative investments such as real estate have been a key part of institutional portfolios for over 20 years, but due to the changing economic environment, there continues to be a search for newer opportunities. One alternative asset class that has grown in attractiveness in recent years is commodities.