Hedging inflation: The role of expectations
March 16, 2011
The growing interest in inflation hedging spotlights investors' need for a clear understanding of the relationship between asset returns and inflation. Based on the historical relationship between inflation and the distribution of potential returns for various asset classes, our analysis suggests that commodity futures collateralized with U.S. Treasury bills can provide an effective partial hedge against inflation, particularly in the near term. For investors with long time horizons, a well-diversified portfolio of stocks, bonds, and other asset types remains the most suitable strategy for managing risk.
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