Protecting Against Inflation: Evaluating Inflation Hedge Misconceptions and Strategies
The financial media are full of conjecture about which strategies might effectively hedge inflation risk or not. Here we explore which asset classes, if any, have been effective at protecting against inflation risk. First, it is helpful to address some common logical and analytical misconceptions about hedging inflation risk.
Focus on Correlation, Not Volatility
When evaluating whether an asset class effectively protects against inflation, the focus should be on the correlation between that asset class’s returns and inflation and not the relative volatility of the asset class’s returns when compared with the volatility of inflation. This misconception often leads to assumptions, such as commodities as an asset class cannot effectively hedge inflation because its returns are about 8–10 times more volatile than inflation. This is simply false.
Read the rest of the article on Multifactor World.