Magazine article Modern Trader

Goldman Strikes Up Index Alternative

Magazine article Modern Trader

Goldman Strikes Up Index Alternative

Article excerpt

Goldman strikes up index alternative

Portfolio managers may get a better grip on how to measure commodity performance thanks to a new index from a Wall Street heavyweight.

Goldman, Sachs & Co. recently released its new Goldman Sachs Commodity Index (GSCI), which it describes as an asset management tool for traditional stock and bond portfolios. Goldman - long involved in commodity, bond and stock trading - hopes to offer a way to invest in the index by year-end.

"Our desire was to create a benchmark for commodity investment," says James Crimmons, a Goldman strategist.

The index, made up of 18 commodities, is always long the nearby month. Over time, Goldman found that strategy produced a net positive result due to the tendency for markets to go into periods of backwardation.

From 1970 to 1990, the GSCI was negatively correlated to the Standard & Poor's (S&P) 500 by 0.32 and government bonds by 0.19 on a quarterly basis. A 5% investment in GSCI in addition to a traditional 60% stocks and 40% bonds portfolio in that time would have raised annual returns to 9.8% from 9.6% and lowered annual risk to 11.5% from 12.1%.

Goldman also contends GSCI could be used as an inflation hedge due to its 0.55 correlation with the consumer price index and its 0.75 correlation with the producer price index.

To focus on global consumption (for which figures are difficult to obtain), the index is weighted according to world production. The configuration is updated annually based on United Nations figures. Crude oil, gasoline and heating oil now account for 48% of the index. …

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