The Case for Long-Short Commodity Investing: Performance, Volatility and Diversification Benefits
EDHEC Business School
Auckland University of Technology
September 5, 2012
The paper studies the performance and volatility of long-only and long-short commodity portfolios and their conditional correlations with stocks and bonds. We present strong evidence in favor of long-short (as opposed to long-only) commodity investments. Long-short portfolios (based on momentum, term structure or hedging pressure) are found to present better performance, lower volatility and lower correlation with stocks than their long-only counterparts. Long-short hedging pressure portfolios stand further out as they present decreasing correlations with the S&P500 index in periods of heightened volatility in equity markets: unlike long-only commodity portfolios, they thus serve as partial hedge against extreme equity risk.
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: September 11, 2012
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