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Alternative Market Briefing

New Edhec study finds commodities still offer diversification benefits

Tuesday, October 25, 2011

amb
Joelle Miffre
By Beverly Chandler, Opalesque London:

The latest study from the Edhec-Risk Institute tackles the issue of whether investing in commodities for financial gain has caused greater volatility and a decade long rise in commodity prices over recent years.

The study, entitled 'Long-Short Commodity Investing: Implications for Portfolio Risk and Market Regulation' and authored by EDHEC-Risk Institute Professor Jolle Miffre was produced with market data and support from CME Group. It also sought to clarify whether increased use of commodities as investment tools has caused them to lose their traditional strength of non-correlation with financial investments.

The study starts by examining the performance and risk characteristics of long-only commodity index investments favoured by passive investors and of long/short commodity strategies of the kind implemented by hedge fund managers. The research is based on an exercise of mimicking the trading behaviour of long-short participants in commodity futures markets over the period 1992-2011, using data pulled from Datastream.

This is done by implementing a battery of long-short strategies, where these strategies are based on a momentum signal, on the slope of the term structure, on a doublesort that combines momentum and term structure signals, or on the positions of commercial traders (also often termed "hedgers") and non-commercial traders (also often referred to as "speculators").

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