The Case for Long-Short Commodity Investing
EDHEC Business School
Auckland University of Technology
September 5, 2012
Journal of Alternative Investments, Vol. 18, No. 9, 2015
The article presents strong evidence in favor of long-short (as opposed to long-only) commodity investments. We show that long-short fully-collateralized commodity portfolios based on momentum, term structure or hedging pressure present higher Sharpe ratios, lower volatility and lower correlation with the S&P500 index than long-only commodity portfolios. Besides long-short hedging pressure portfolios serve as partial hedge against extreme equity risk as they present decreasing correlations with the S&P500 index in periods of heightened equity volatility. This is good news to equity investors: it is precisely when the volatility of equity markets is high that the benefits of diversification are most appreciated. In contrast, the conditional correlation between the S&P500 and long-only commodity indices substantially rises with the S&P500 volatility, suggesting that the risk diversification of long-only commodity portfolios prevails less when needed most.
Number of Pages in PDF File: 37
Keywords: Commodity futures, Conditional volatility, Conditional correlation, Long-short portfolios, Professional money managers, Financialization
JEL Classification: G11, G13
Date posted: September 1, 2011 ; Last revised: November 11, 2015
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