very very awesome paper on commodity futures returns...

[DcifrThs]

this paper has enlightened me.

commodity futures returns historically linked to "backwardation" or "roll yield" seem to be simply proxies for inventory indicators from the theory of storage.

namely, the basis (difference between spot price and next nearby futures price), when large and positive is indicative of a steeply backwarded futures curve. when it is negative, the curve is in contango.

low inventory levels amt to low supply and thus high demand now. lower inventory levels also mean higher volatility (concave increasing function according to the paper).

this is just some fo the great insights from this paper:

Fundamentals of commodity futures returns

enjoy!

Barron

[maxtower]

What kind of long term returns are possible in broad commodity futures?

[ahnuld]

heh, I have a midterm on this subject on tuesday and was just studying this at the library.

[DcifrThs]

[ QUOTE ]
heh, I have a midterm on this subject on tuesday and was just studying this at the library.

[/ QUOTE ]

lol, really? sounds like a great class...is it something like "data analysis for investments"?

that was a matlab based class i took for my MBA.

either way, interesting stuff. is there anything you'd like to add about the paper that i haven't gotten to/taken away yet?

thanks,
Barron

[DcifrThs]

[ QUOTE ]
What kind of long term returns are possible in broad commodity futures?

[/ QUOTE ]

well it depends as always.

one major thing is whether you are going to manage the commodity futures.

an explicit implication of the study is that low inventory portfolios (i.e. portfolios of commodities that have low recent inventory figures) outperform high inventory portfolios (by 8.06% w/ a tstat of 3.19...so marginally significant but large estimate).

simply taking long positions in futures will likely reduce the highest returns you could generate since the low inventory portfolio would then be mixed together with exposure to periods of time where many of the commodities in the mix are experiencing strong periods of good supply (high inventory).

further, the real time construction of these portfolios requires good real time data without a lag. in reality, that isn't entirely possible. so i still think that commodity futures can deliver positive returns, though nowhere near as high as other asset classes. for my portfolio construction tests i typically assign commodities something like a .10 or .15 sharpe ratio (.15 is the most generous i'd think about) with about a 20% or so volatility. i'd reduce the volatility if the commodity futures exposures were deleveraged.

one interesting implication is that while "returns from backwardation" are spurious on the face of it (b/c the "hedging" theory seems to simply be a proxy), the returns generated from ETFs or CCFs that invest most highly in steeply backwardated futures curves are likely to be higher than those that simply invest in a broad basket of commodities.

the reason is obviously that the basis for those ETFs is on average higher, and thus inventories more likely to be strained than in a broad basket so those managers, unwittingly, are delivering a kind of "low inventory" portfolio.

overall, i don't know the simple # that you could generate, but i don't think it is near other asset classes.

Barron

[yukoncpa]

[ QUOTE ]
so I still think that commodity futures can deliver positive returns, though nowhere near as high as other asset classes.


[/ QUOTE ]

Hi
would you mind elaborating on this sentence? It’s been a while since I’ve studied these things so I’m a bit lost on your terminology. Other asset classes being what? Other classes of call options? Or other non-commodity type stocks ( not options, just straight purchases) , such as the stocks Warren Buffet prefers? I’m a newbie at investing, so sorry about not completely understanding your posts, but I do love reading them. I’m not even sure if I’ve made my question clear.

[Mark1808]

[ QUOTE ]
this paper has enlightened me.

commodity futures returns historically linked to "backwardation" or "roll yield" seem to be simply proxies for inventory indicators from the theory of storage.

namely, the basis (difference between spot price and next nearby futures price), when large and positive is indicative of a steeply backwarded futures curve. when it is negative, the curve is in contango.

low inventory levels amt to low supply and thus high demand now. lower inventory levels also mean higher volatility (concave increasing function according to the paper).

this is just some fo the great insights from this paper:

Fundamentals of commodity futures returns

enjoy!

Barron

[/ QUOTE ]

Since the higher returns are asscociated with higher volitility is it safe to assume that low inventory commdoities do not outperform on a risk adjusted basis? Or did the author not address this? Also, a sharp differance between spot and futures is often the result of a high cost of carry and not neccesarily low inventories. At any rate the best advice I ever received about trading commodity futures was to "lie down until the desire to trade went away."

[CrushinFelt]

[ QUOTE ]
low inventory levels amt to low supply and thus high demand now. lower inventory levels also mean higher volatility (concave increasing function according to the paper).


[/ QUOTE ]

This basically describes what has been happening in the CBOT wheat futures market since I started working in June.

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
this paper has enlightened me.

commodity futures returns historically linked to "backwardation" or "roll yield" seem to be simply proxies for inventory indicators from the theory of storage.

namely, the basis (difference between spot price and next nearby futures price), when large and positive is indicative of a steeply backwarded futures curve. when it is negative, the curve is in contango.

low inventory levels amt to low supply and thus high demand now. lower inventory levels also mean higher volatility (concave increasing function according to the paper).

this is just some fo the great insights from this paper:

Fundamentals of commodity futures returns

enjoy!

Barron

[/ QUOTE ]

Since the higher returns are asscociated with higher volitility is it safe to assume that low inventory commdoities do not outperform on a risk adjusted basis? Or did the author not address this? Also, a sharp differance between spot and futures is often the result of a high cost of carry and not neccesarily low inventories. At any rate the best advice I ever received about trading commodity futures was to "lie down until the desire to trade went away."

[/ QUOTE ]

i think the author did address this but i'll have to reread. what i'm thinking now is that since the relationships are non-linear, it may be the case that there is an increasing concave down relationship between inventory levels and futures price volatility. in that case, the lower inventory levels could indeed have a higher sharpe ratio.

my whole goal here is simply to create a passive portfolio with commodity expore that costs the least and gives the highest sharpe ratio addition....i'm not looking to trade commodities in an active sense in any case other than when i feel i have an edge.

Barron

[Preem]

I posted a link to this research paper about six months ago. Where were you, then?