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The Case for Long-Short Commodity Investing

37 Pages Posted: 1 Sep 2011 Last revised: 11 Nov 2015

Joëlle Miffre

Audencia Nantes School of Management; Audencia Business School

Adrian Fernandez-Perez

Auckland University of Technology

Date Written: September 5, 2012

Abstract

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

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

Joelle Miffre (Contact Author)

Audencia Nantes School of Management ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

Adrian Fernandez-Perez

Auckland University of Technology ( email )

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand
+64 9 921 9999 (Phone)
+64 9 921 9940 (Fax)

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