KRF: No, my views have not changed—at least on this topic. Here's the thrust of my 2004 presentation. The claims that, going forward, commodity funds (i) will have the same Sharpe ratio as the stock market, (ii) will be negatively correlated with the returns on stocks and bonds, and (iii) will be a good hedge against inflation can't all be true. Who would want the other side of this trade? The high volatility of commodity prices makes it impossible to accurately estimate the expected returns, volatilities, and covariances of commodity funds, but theory suggests that if commodity returns are negatively correlated with the rest of the market, the expected risk premium on commodities is small, perhaps negative. Finally, commodity funds are poor inflation hedges. Most of the variation in commodity prices is unrelated to inflation. In fact, commodity indices are typically 10 to 15 times more volatile than inflation. As a result, investors who use commodity funds to hedge inflation almost certainly increase the risk of their portfolios. Six years after my presentation, I still think these points are correct. Commodity funds are probably a good investment for some investors, but not for the reasons many of their advocates suggest.
Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP.