CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

23.1 INTRODUCTION

Commodity investment and analysis often include a number of concepts that are unique to commodities. This is due to the fact that commodities are fundamentally different from many traditional securities. Financial securities are claims on a profit-generating enterprise,1 while commodities are simply raw materials used in the production of goods and services. Even among alternative investment strategies, commodity strategies are unique. Most alternative investments are trading strategies based on the purchase and sale of traditional securities. For example, hedge funds typically utilize publicly traded stocks and bonds. The valuation methods and risk factors of private equity strategies are closely related to those of public equity strategies. Investment strategies such as those based on earnings per share (EPS) forecasting or value-based investing, which are effective when applied to traditional assets, may not be effective when applied to commodities.

The opposite is also true. Effective commodity strategies based on an understanding of seasonal patterns in commodity demand, market pressures leading to the existence of backwardation and contango, do not always work as well in traditional markets. While some of this is due to differences in the way the commodity and traditional securities markets are organized, it is also due to the fundamental difference between the economic and market factors driving traditional equity and fixed-income securities versus those ...