EDHEC-Risk Concept Industry Analysis Featured Analysis Latest EDHEC-Risk Surveys Features Interviews Indexes and Benchmarking FTSE EDHEC-Risk Efficient Index Series FTSE EDHEC-Risk ERAFP SRI Index EDHEC-Risk Alternative Indexes EDHEC IEIF Quarterly Commercial Property Index (France) Hedge Fund Index Research Equity Index Research Amundi "ETF, Indexing and Smart Beta Investment Strategies" Research Chair Rothschild & Cie "Active Allocation to Smart Factor Indices" Research Chair Index Regulation and Transparency ERI Scientific Beta Performance and Risk Reporting Hedge Fund Performance Performance Measurement for Traditional Investment CACEIS "New Frontiers in Risk Assessment and Performance Reporting" Research Chair Asset Allocation and Alternative Diversification Real Assets Meridiam Infrastructure/Campbell Lutyens "Infrastructure Equity Investment Management and Benchmarking" Research Chair Natixis "Investment and Governance Characteristics of Infrastructure Debt Instruments" Research Chair Société Générale Prime Services (Newedge) "Advanced Modelling for Alternative Investments" Research Chair CME Group "Exploring the Commodity Futures Risk Premium: Implications for Asset Allocation and Regulation" Strategic Research Project Asset Allocation and Derivative Instruments Volatility Research Eurex "The Benefits of Volatility Derivatives in Equity Portfolio Management" Strategic Research Project SGCIB "Structured Investment Strategies" Research ALM and Asset Allocation Solutions ALM and Private Wealth Management AXA Investment Managers "Regulation and Institutional Investment" Research Chair BNP Paribas Investment Partners "ALM and Institutional Investment Management" Research Chair Deutsche Bank "Asset-Liability Management Techniques for Sovereign Wealth Fund Management" Research Chair Lyxor "Risk Allocation Solutions" Research Chair Merrill Lynch Wealth Management "Risk Allocation Framework for Goal-Driven Investing Strategies" Research Chair Ontario Teachers' Pension Plan "Advanced Investment Solutions for Liability Hedging for Inflation Risk" Research Chair Non-Financial Risks, Regulation and Innovations Risk and Regulation in the European Fund Management Industry Index Regulation and Transparency Best Execution: MiFID and TCA Mitigating Hedge Funds Operational Risks FBF "Innovations and Regulations in Investment Banking" Research Chair EDHEC-Risk Publications All EDHEC-Risk Publications EDHEC-Risk Position Papers IPE EDHEC-Risk Institute Research Insights AsianInvestor EDHEC-Risk Institute Research Insights P&I EDHEC-Risk Institute Research for Institutional Money Management Books EDHEC-Risk Newsletter Events Events organised by EDHEC-Risk Institute EDHEC-Risk Smart Beta Day Amsterdam 2017, Amsterdam, 21 November, 2017 EDHEC-Risk Smart Beta Day North America 2017, New York, 6 December, 2017 Events involving EDHEC-Risk Institute's participation EDHEC-Risk Institute Presentation Research Programmes Research Chairs and Strategic and Private Research Projects Partnership International Advisory Board Team EDHEC-Risk News EDHEC-Risk Newsletter EDHEC-Risk Press Releases EDHEC-Risk in the Press Careers EDHEC Risk Institute-Asia EDHEC Business School EDHEC-Risk Executive Education EDHEC-Risk Advances in Asset Allocation Blended Learning Programme 2017-2018 Yale School of Management - EDHEC-Risk Institute Certificate in Risk and Investment Management Yale SOM-EDHEC-Risk Harvesting Risk Premia in Alternative Asset Classes and Investment Strategies Seminar, New Haven, 5-7 February, 2018 Investment Management Seminars Contact EDHEC-Risk Executive Education Contact Us ERI Scientific Beta EDHEC PhD in Finance
Features
Commodities - November 14, 2011

Long-Short Commodity Investing: Implications for Portfolio Risk and Market Regulation

The rise in commodity prices over the last ten years and their recent volatility has generated considerable interest on the part of investors, regulators and policy-makers.

Attracted by the prospect of robust returns, diversification benefits, and potential for hedging inflation and macroeconomic risks, investors have increased their allocations to commodities over the period, primarily via passive investment into long-only commodity futures indices. Recent market gyrations have contributed to reviving the debate on the role of commodities in strategic and tactical asset allocation and led to an increasing recognition of the relevance of long-short dynamic strategies to capture the commodities premium in the context of highly volatile markets.

The increased participation of financial investors on commodity markets has caused concerns about the latter’s possible increased integration with traditional financial markets, which could have weakened the diversification and hedging benefits from commodity investment.

The high volatility in commodity prices has also led to contentious political pronouncements on the role of financial investment in commodity markets and to calls for further regulation.

The attached publication addresses these issues head on. It examines commodity futures investment over the last ten years to shed new academic evidence on the performance of passive as well as active commodity investment and their conditional volatility and conditional correlations with traditional assets. It also investigates whether the increased participation of index and long-short investors on commodity futures markets has had an impact on the volatility of prices or the traditional benefits of commodities as an asset class. The publication’s in-depth consideration of long-short strategies is particularly notable as the extant academic literature has focused on long-only investments.

The research results confirm the relevance of commodity futures investment and document the benefits of adopting long-short strategies in terms of risk-adjusted performance, diversification and extreme-risk hedging. They find no support for the hypothesis that long-short investors have destabilised commodity markets by increasing volatility or co-movements between the prices of commodity futures investments and those of traditional assets. This holds true whether investors are defined broadly or approached as non-commercial traders or professional money managers. The results on the performance and risk characteristics of long-only and long-short commodity futures investing have important practical consequences for investors that are considering or have implemented commodity investment programmes.

This study was produced as part of a research programme on ”Exploring the Commodity Futures Risk Premium: Implications for Asset Allocation and Regulation" in partnership with CME Group.