Absolute Returns in Commodity Futures Programs

19 Pages Posted: 28 Jun 2015

See all articles by Hilary Till

Hilary Till

Premia Research LLC; EDHEC-Risk Institute; J.P. Morgan Center for Commodities, University of Colorado Denver Business School; Global Commodities Applied Research Digest

Jodie Gunzberg

S&P Dow Jones Indices

Date Written: April 29, 2005

Abstract

In this paper, we introduce readers to commodity (natural resource) futures programs. We begin by describing the present investment landscape as one where return compression in a number of popular hedge fund strategies has led absolute-return investors to investigate other promising return sources. This includes the highly volatile natural-resource markets.

The second section discusses how (real) spot commodity prices have been in a long-term secular decline, which has meant that in the past, most arguments for investing in commodities have had to rely on one of the two following rationales. An investment in a commodity futures program has had to (1) capture cyclical opportunities, or (2) provide an inherent risk premium that has only been available in certain futures markets. This latter concept is admittedly esoteric and will be explained later in this paper.

In the paper’s third section we will argue that current commodity investment programs, which are designed to either capture cyclical opportunities or monetize risk premia, are still valid in the current environment. But we will further note that one can also make a plausible case for investing in commodities based on increases in spot commodity prices.

In the concluding section of the paper, we will outline the risk management requirements for a commodity investment program, given that absolute-return investors require that hedge funds control downside risk.

Keywords: Commodity futures, risk management, hedge funds, supply shocks, returns

JEL Classification: G11, G23

Suggested Citation

Till, Hilary and Gunzberg, Jodie, Absolute Returns in Commodity Futures Programs (April 29, 2005). Available at SSRN: https://ssrn.com/abstract=2623650 or http://dx.doi.org/10.2139/ssrn.2623650

Hilary Till (Contact Author)

Premia Research LLC ( email )

United States
312-583-1137 (Phone)
312-873-3914 (Fax)

HOME PAGE: http://customindices.spindices.com/custom-index-calculations/premia/all

EDHEC-Risk Institute

Nice
France

HOME PAGE: http://risk.edhec.edu/

J.P. Morgan Center for Commodities, University of Colorado Denver Business School ( email )

1475 Lawrence St.
Denver, CO 80202
United States

HOME PAGE: http://www.business.ucdenver.edu/commodities

Global Commodities Applied Research Digest ( email )

J.P. Morgan Center for Commodities
1475 Lawrence Street
Denver, CO 80202
United States

HOME PAGE: http://www.jpmcc-gcard.com/hilary-till

Jodie Gunzberg

S&P Dow Jones Indices ( email )

55 Water Street
Fl 27
New York, NY 10041
United States

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