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Devraj Basu Florian Guldner, Opalesque Europe/Asia:

The last decade has seen a resurgence of interest in commodity futures as an investment class, particularly from institutional investors. Their allocation to commodities has grown dramatically with total commodity linked assets under management rising to $257bn in 2009 from $18bn in 2003, according to Barclays Capital. The vast majority of these investments are linked to long-only commodity indices such as the GSCI, with ETFs and ETNs based on single commodities such as crude oil also attracting considerable interest.

Although the popularity of long-only indices remains strong, there is an increasing awareness that active approaches to commodity investing might perform better.

A team of researchers led by Devraj Basu, Associate Professor of Finance at SKEMA Business School, recently published a white paper on a long/flat trading strategy capturing backwardation in commodity futures markets, i.e. a situation in which the expected futures spot price is higher than the current futures spot prices, and a long position in the underlying futures contract is likely to generate a positive return.

Hypothesis and strategy The original hedging pressure hypothesis of Keynes (1930) was that commodity futures markets were always in normal backwardation, as they served an insurance function, allowing producers to transfer price risks to speculators who would thus earn a risk premium. The Keynesian hedging pressure hypothe......................

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