COMMODITY FUTURES
Natural Hedges tal during the summer since both trades
The portfolio in Table 3 contained a macro-level hedge in the can be highly correlated.
form of a deferred Eurodollar futures position. Eurodollar futures
are contracts on short-term US$ interest rates. In many ways, this Conclusion
represents an ideal trade. It was a positive expected value trade Risk management may be the most
during normal times, and it reduced the portfolio’s worst-case loss important element of a trading pro-
under our eventful scenarios. gram. In our case, we attempt to man-
age risk on three levels:
Strategy Example From 2007 (1) At the individual trade level,
We noted previously that only positions that are unrelated to each (2) Per strategy bucket, and
other are awarded full risk capital. (3) On a portfolio-wide basis.
One example of trades that need to be classified in the same strat- Our process also relies heavily on a
egy bucket is directional position-taking in natural gas and corn dur- menu of risk metrics so as to manage
ing the summer. Both of these commodity markets are extremely eventful risk through the prodigious use
sensitive to weather outcomes in the US Midwest, particularly in July. of historical back-testing
•
Figure 3 shows how the fortunes of natural gas and corn futures
prices waxed and waned at similar times from June 11
th
through
The authors are both principals of
July 30
th
, 2007. What this means for a commodity portfolio manager
Premia Capital Management, LLC, a
is that directional trades in these two markets need to share risk capi-
proprietary investment & research firm.
Hilary Till is also a research associate
References
with the EDHEC Risk and Asset
Cootner, P., 1967, “Speculation and Hedging”, Food Research Institute Studies,
Management Research Centre.
Supplement, 7, pp. 65-106.
www.premiacap.com
Hooker, M., 2007, “Benchmark-Relative Risk in Active Commodities Portfolios:
This article is largely drawn from chapter
Incorporating Fat Tails and Downside Risk,” in H. Till and J. Eagleeye (ed) 20 of the book, “Intelligent Commodity
Intelligent Commodity Investing (London: Risk Books), pp. 471-490.
Investing” (London: Risk Books, 2007).
Till, H. and J. Eagleeye, 2006, “Commodities - Active Strategies for Enhanced Return”,
More information can be found at:
In Robert Greer, ed., The Handbook of Inflation Hedging Investments, (New York:
www.riskbooks.com/intelligentcommodity
McGraw-Hill), pp 127-157. Also in Journal of Wealth Management, 2005, Fall, pp. 42-
61.
BUSINESS NETWORK
Essen /Germany 19.-21.2.2008
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