New related paper to #21 – Momentum Effect in Commodities and #22 – Term Structure Effect in Commodities

"Over the time period analyzed, momentum strategies have provided the best risk-adjusted returns of the three groups, although clustering around a higher level of volatility than Roll and Other Style strategies. Strategies that successfully captured some Roll return also offered better performance than the rest of the universe. Looking ahead, we recommend that investors focus on strategies that aim to capture Roll and/or Momentum as sources of return in the commodities space, because we found these sources of return to be based on sound theories that we expect them to continue in the future.

Regarding Inflation Hedging properties, all types of strategies, on average, exhibited better returns in times of positive inflation surprises. However, Long-only Roll and Momentum strategies provided the best inflation hedge, because portfolios that are more tactical are not consistently exposed to commodity prices over time

Commodity strategies, in general, have low correlations to stocks and bonds, so they improve diversification when incorporated into a portfolio. However, we saw that not all strategies offered equally attractive diversification benefits. Roll and Momentum based strategies offered the greatest diversification benefits of the studied group, and within them, long-short strategies were the best diversifiers.

We analyzed the risks of investing in commodities in three dimensions. The first was in regard to the volatility of returns. Momentum strategies exhibited the highest levels of volatility, making them the riskiest type of strategy in this dimension and prone to greater drawdowns.

The second dimension we analyzed was variance concentration. When we examined the variance contributions by sector to total portfolio variance of passive indices, risk parity strategies, and long-short momentum strategies, we found the S&P GSCI to be the most concentrated of all, which means that it derives most of its risks from only one sector (energy). As expected, risky parity strategies offered the most balanced risk exposures, while the more tactical long-short strategies regularly varied their concentrations. However, long-short strategies can be highly concentrated for short periods of time.

Finally, the third dimension we evaluated was tracking error. Using the Bloomberg Commodity Index as the benchmark, we found that Momentum Style strategies exhibited the highest tracking error, especially regarding the most tactical strategies such as long-short and long-neutral. On the other hand, strategies with Some Roll Capture had the lowest tracking error in the sample. Overall, all commodity futures strategies have higher levels of tracking error than equity managers when compared to their respective benchmarks."

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