37 Pages Posted: 1 Sep 2011 Last revised: 11 Nov 2015
Date Written: September 5, 2012
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.
Keywords: Commodity futures, Conditional volatility, Conditional correlation, Long-short portfolios, Professional money managers, Financialization
JEL Classification: G11, G13
Suggested Citation: Suggested Citation
Miffre, Joëlle and Fernandez-Perez, Adrian, The Case for Long-Short Commodity Investing (September 5, 2012). Journal of Alternative Investments, Vol. 18, No. 9, 2015. Available at SSRN: https://ssrn.com/abstract=1920454 or http://dx.doi.org/10.2139/ssrn.1920454