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

25.1 INTRODUCTION

In contrast to traditional stock and bond markets, research has shown that commodities offer unique risk and return alternatives. These risk and return alternatives are due to the unique supply-and-demand conditions affecting physical spot markets as well as the changing carry and storage relationships that influence futures pricing. When one adds micro market impacts related to unique trading processes in commodity markets, including rollover and delivery impacts, it is evident that there exist numerous potential opportunities to generate profits. The questions remain, however, to what degree commodities can offer returns consistent with their underlying risk exposure, and whether various commodity investment strategies also offer the potential for commodity alpha. Most of these strategies involve trading commodities themselves, or trading the stocks of companies involved with commodities. This chapter provides an overview of these strategies. Many are standard hedge fund or managed futures strategies, and are covered extensively in other sections of this book.

Commodity trading strategies can be separated into two broad groups: directional and relative value. Directional strategies take outright positions based on a forecast of market direction. Relative value strategies attempt to identify mispriced assets or securities and to hedge away some or all of the market exposure.