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

26.1 INTRODUCTION

The return to commodity beta may be defined as the fundamental risk-based return from holding a passive long position in a commodity. For example, to deliver oil-based commodity beta, an investor can use a number of investment vehicles that capture the price change in a particular oil-based commodity investment. Historically, indirect investments (e.g., equity ownership of firms specializing in direct commodity market production) have been the principal means by which many investors obtain exposure to this asset class. Investment through commodity-based equity firms, however, mixes equity beta with commodity beta. The matter is further complicated by the complex commodity exposures and degree of commodity price risk hedging by commodity-based corporations. However, in recent years, the number of investable commodity indices and commodity-linked investments has increased dramatically. This chapter provides an outline of the wide range of investment products that are currently available to acquire commodity beta exposure. Since most commodity investment is in some way linked to commodity indices, we discuss the characteristics of commodity indices and enhanced commodity indices as well as the calculation of their returns. Finally, the chapter provides an overview of some of the major commodity indices upon which the returns of many commodity investment vehicles are based.

Select Highlights in Commodity Investment Product Development

Pre-1990

Most commodity investment ...