Popularity boom for long/short commodity strategies

A number of commodity experts including Man Group and EDHEC have highlighted why long/short commodity strategies are increasingly attractive to investors seeking low correlation to equities and bonds and strong performance.

EDHEC-Risk Institute Professor Joëlle Miffre (pictured) has examined commodity investment in a newly published study that concludes taking long and short positions when investing in commodities produces the most attractive returns, and that new regulation aimed at the rising number of commodities investors is unwarranted.

Meanwhile Luke Ellis, head of Man Multi-Manager, has recently explained why investors are drawn to systematic trend-following commodity trading advisor (CTA) strategies in particular, and how they outperformed other strategies in August and September’s adverse market conditions.

At the same time Malta-based platform provider ML Capital has conducted a survey revealing the growing popularity of alternative Ucits funds running CTA strategies.

Miffre’s study is entitled “Long-Short Commodity Investing: Implications for Portfolio Risk and Market Regulation.”

Miffre is professor of finance at EDHEC Business School and a member of EDHEC-Risk Institute. Her work focuses on asset management with an emphasis on commodities, active strategies and asset pricing. She also acts as scientific advisor to a CTA.

Her study looks at the performance and risk characteristics of long-only commodity index investments favoured by passive investors and of long/short commodity strategies commonly implemented by hedge fund managers.

Over the period examined (1992-2011), the mean excess return of the Standard and Poor’s Goldman Sachs Commodity Index (S&P-GSCI) equals 0.64% per year and that of the long-only equally-weighted portfolio of the twenty seven commodities in the study is 4.28%.

By contrast, the average mean excess return of the long/short portfolios equals 7.99% when only one type of signal is used and 9.03% when two signals are used in combination.

The study also confirmed the low correlations of long-only and long/short commodity portfolios with equities and bonds demonstrating the strategic role of commodity investments as diversifiers of both equity and fixed income risks.

The mean in the average conditional correlations of the S&P500 index relative to long/short indices stands at just 0.0559 and that of the long-only indices equals 0.5402.

However, the study also indicated that the correlation between long-only commodity portfolios and equities has risen sharply since the downfall of Lehman Brothers.

Conversely long/short commodity portfolios were found to provide a partial hedge against extreme risks in equity markets as correlations fall when the volatility of equities rises. They also withstand turbulence in fixed income markets better.

Miffre’s study concluded that there is no support for the hypothesis that investors have destabilised commodity prices by increasing volatility between commodity prices and those of traditional assets.

Miffre therefore dismissed the notion that new regulation is needed to reflect the increased participation of professional money managers in commodity futures markets.

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