How to Use Exotic Assets for Trading Strategy Improvement

Abstract

Popular and liquid assets are usually overpriced compared to less-known (exotic) assets/securities. Additionally, more professional investors usually follow popular assets, because this market segment is probably significantly more efficient and it does not bear liquidity issues. So, we went in this direction to test these popularity and liquidity premiums. We took a well-known commodity momentum factor strategy and investigated its performance among commodity futures that were part of the S&P GSCI respectively BCOM commodity indexes and then compared the strategy’s performance with a variant that traded only nonindexed commodity futures. As we had expected, the trading strategy using exotic assets performed significantly better.

Keywords: commodities, factor allocation, factor investing, liquidity effect, trend-following

JEL Classification: G11, G12