Weathering the Storm in Commodity Risk Premia Strategies

Abstract

This article provides a brief introduction to risk premia strategies and notes how commodity risk premia strategies are an extension of ideas that were originally developed for the equity markets. The paper considers how to manage the risks of these strategies and discusses the importance of a modicum of fundamental analysis. The article further covers the active management of risk premia strategies and includes a number of techniques that attempt to minimize the inevitable losses that can arise from such strategies. The paper concludes with providing several hypotheses, based on recent academic research, on why a number of commodity risk premia strategies have historically earned high average returns.

Keywords: Commodity futures, risk premia, factor investing, momentum, carry, basis- momentum, negative skewnesss

JEL Classification: G1, G11