UK – Commodities could become more popular than hedge funds among institutional investors, according to Credit Suisse.

According to a spokesperson, pension funds find commodities quite “compelling”, especially because they are less expensive than hedge funds.

Most schemes are allocating roughly 5% to commodities. “They don’t just want to dip a toe in the water, but make a meaningful contribution,” said the spokesperson. “Below this, there is less of an impact,” he added.

Much of the allocation to commodities is coming at the expense of lower allocations in equities, said the spokesperson.

In a statement released today, Credit Suisse stated it believes commodities answer the fundamental need of institutional investors for long-term strategic diversification and urged investment in a broad commodities index.

“They demonstrate exceptionally low correlations with financial assets in markets around the world, and can help diversify the institutional portfolio more effectively than conventional asset classes and many so-called ‘alternative’ assets over the intermediate and long term,” it said.

According to Credit Suisse, commodities have lower correlations to traditional asset classes than hedge funds and real estate investment trusts.

Terry Mellish, director of UK institutional sales, said: “We believe the question of whether commodities have had their day in the sun is secondary. More important, in our view, is that diversification is always in season and commodities diversify a portfolio more than any other asset class.”

Apart from acting as a natural inflation hedge, commodities tend to perform best when conventional assets perform worst.

“Commodities usually shine when global industrial production, and the corresponding demand for raw materials, is strong,” the firm said.