Victor Sperandeo … aka “Trader Vic” … is one of the best-known commodity traders in the world. The president and CEO of Alpha Financial Technologies, Sperandeo is the father of the popular S&P Commodity Trends Indicator, one of most popular long/short commodity indexes on the market, and has been profiled in books such as “Super Traders” and “New Market Wizards.” He spoke recently with IndexUniverse.com Editor Matt Hougan about the outlook for commodities and how investors should be positioning their portfolios today.

IndexUniverse.com: We have seen huge flows into long-only commodity index products over the past few years, something you’ve been quite critical of. Why are you against long-only commodity indexes?

Victor Sperandeo (Trader Vic): It’s really very simple: Stocks tend to be secular, but commodities are always cyclical. They will never be anything else. They go up and they go down. If you want to buy and hold them, you’re not going to go anywhere.

IndexUniverse.com: But why?

Trader Vic: You cannot innovate higher productivity in corn. You can grow more corn, but that actually makes the price go down. Companies can add value through innovation and growth; commodities can’t.

You see it in the data. In 1930, corn was $0.75 a bushel. Even with the growth of ethanol, the long-term compound return since then is 1.75 percent per year. Over 70 years! Meanwhile, stocks have delivered returns closer to 8 or 9 percent per year.

It’s not that long-only positions in commodities do nothing. If you buy and hold a long-only strategy, you will add efficiency to your portfolio in inflationary environments. But you will not really make any money.

Again, the data: The long-term return of the S&P GSCI Index since 1991 is under 2 percent. Why? Because the GSCI is 75 percent energy, and when oil went from $140/barrel to $35/barrel last year, investors forfeited all of their gains from the past decade.

You can get outrageously better returns with far less risk using a long/short concept. Since 1991, the [long/short] S&P CTI Index has produced compound price returns of 6.32 percent a year. Meanwhile, its standard deviation is much lower than the S&P GSCI: 12 vs. 21. Its maximum drawdown is much better too: 19.7 percent vs. 67.7 percent for the GSCI.

I’m highlighting the CTI because it’s the one I’m most familiar with. But any well-designed long/short index will beat a long-only index over the long term. There may be periods when long-only outperforms, but over the long haul, it’s no contest.

“As a buy-and-hold investment over the next few years, gold is the best investment in the world and 30-year Treasurys are the worst.”

IndexUniverse.com: So what do you say to folks like Jim Rogers who are calling for a one-time “step-up” in prices due to the growth of China and other emerging markets?

Trader Vic: Jimmy is a wizard investor, but he’s not a trader. He has a Warren Buffett mentality. He sees a long-term environment of inflation and he’s willing to live through last year’s pullback in commodities because he’s investing. That’s why he’s long-only. Even though commodities are cyclical, he sees this particular cycle overall as a bull market cycle. I don’t necessarily disagree with that.

But I’m more of “give me the money every year.” I’m not an investor. I’m “Trader Vic.” I don’t like losing 40 percent in a year. Jim’s index fell 42 percent last year. If I did that, I’d be out of business.

IndexUniverse.com: Why, then, do you think there has been so much growth in long-only products?

Trader Vic: There is a mentality by people like Bob Greer [manager of Pimco’s Real Return Fund] who believe that asset allocation means having exposure to the long side. It’s an institutional mentality towards asset allocation.

If the old portfolio allocation were 60 percent stocks and 40 percent bonds, the new allocation may be 60 percent stocks, 35 percent bonds and 5 percent commodities. They could lose that full 5 percent and not care. They just want exposure. If the markets move, they want to capture it. Even though the empirical evidence is highly against this in the long run, the mentality is, if some event causes oil to spike, we want exposure because we have an allocation to other asset classes that we want to offset.

I disagree with that, but that’s how they think.

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