This paper by Gary Gorton and K. Geert Rouwenhorst examines the historical performance and characteristics of commodity futures as an asset class. The authors construct an equally-weighted index of commodity futures returns from July 1959 to March 2004 to study simple properties of this asset class. They find that fully-collateralized commodity futures have historically offered returns and a Sharpe ratio comparable to equities, with a risk premium similar to that of equities. However, commodity futures returns are negatively correlated with equity and bond returns, primarily due to different behavior over the business cycle. Commodity futures are positively correlated with inflation, unexpected inflation, and changes in expected inflation. The paper also discusses the mechanics of commodity futures investments, the construction of the index, and the historical returns on commodities, spot prices, and collateralized futures. It compares the performance of commodity futures with other asset classes, including stocks and bonds, and explores the correlation between commodity futures returns and other asset classes. The authors conclude that commodity futures can provide diversification benefits and have a unique role in portfolio construction.This paper by Gary Gorton and K. Geert Rouwenhorst examines the historical performance and characteristics of commodity futures as an asset class. The authors construct an equally-weighted index of commodity futures returns from July 1959 to March 2004 to study simple properties of this asset class. They find that fully-collateralized commodity futures have historically offered returns and a Sharpe ratio comparable to equities, with a risk premium similar to that of equities. However, commodity futures returns are negatively correlated with equity and bond returns, primarily due to different behavior over the business cycle. Commodity futures are positively correlated with inflation, unexpected inflation, and changes in expected inflation. The paper also discusses the mechanics of commodity futures investments, the construction of the index, and the historical returns on commodities, spot prices, and collateralized futures. It compares the performance of commodity futures with other asset classes, including stocks and bonds, and explores the correlation between commodity futures returns and other asset classes. The authors conclude that commodity futures can provide diversification benefits and have a unique role in portfolio construction.