Absolute Returns in Commodity Futures Programs
Author | : Hilary Till |
Publisher | : |
Total Pages | : 19 |
Release | : 2015 |
ISBN-10 | : OCLC:1306515451 |
ISBN-13 | : |
Rating | : 4/5 (51 Downloads) |
Book excerpt: 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.