The Many C’s of Commodities and defining their diversification

There is something to alliteration with the letter C. In education circles, the Four C’s describe different skills necessary in the 21st century: Communication, Collaboration, Critical Thinking , and Creativity. The world of Diamonds[1] also has four C’s: Color, Cut, Clarity, and Carat. Five if you include Cost.

In the world of Commodities, we also have an odd propensity to the letter C. Not counting industry words like Chicago, CTA, CME, and Corey Hoffstein, there are at least eight markets following the path of alliteration.

Admittedly, this is meaningless. But what we do find interesting about Commodity markets is their dissimilarity. Commodities are often lumped into one group but contain unique return drivers. We’ve written about this before, looking at Corn and Cattle. In fact, we believe you’ll find more diversification with commodities compared to a similar size basket of stocks.

To put this idea to the test, here’s an alliterative look at the correlations within baskets of commodities and stocks within the last year. Naturally, they all start with C.

 

[1] Little known fact – at one point you could trade Diamond futures on the Indian Commodity Exchange. https://www.business-standard.com/article/markets/icex-launches-the-world-s-first-diamond-futures-contract-117082800788_1.html

Correlations were measured based on daily price change from 7/27/21 – 7/28/22.

So, what are the implications of this?

Despite popular indexes like the S&P GSCI and RICI providing blunt information about “commodities,” the markets comprising those indexes aren’t monolithic. Sometimes it’s crucial to the Cubs’ AVG or OBP, but that’s a very blunt statistic. Knowing the idiosyncratic value that the next player (commodity) brings is more critical when assembling your team.

Switching sports analogies, this is precisely why Dennis Rodman was so valuable to the 90’s Bulls. For a more quantitative exploration into that question, check out Chris Cole’s white paper that uses Dennis Rodman as a metaphor for Long Vol strategies.

In contrast, adding the next stock to your portfolio may not add as much diversification as you think. To be fair, there are many more stocks than commodities. However, especially with the increase in passive investing, a systemic “tide”  can affect virtually all equities.

Furthermore, if you’re thinking about adding “commodities” to your portfolio(a goal we heartily agree with), your method and vehicle matter. A passive index is one way, but funds with actively traded strategies are better suited to capture each commodity’s unique risk sources. Companies want to grow and be more

profitable, increasing stock prices. The bias is always to the long side in equities. Corn and Crude Oil don’t care about your holdings like Caterpillar does, and Carbon Emissions surely doesn’t. These markets are more subject to supply-side factors pushing prices up and down. So consider Trend Following strategies are better suited to profit from those price moves. The data confirms this.

What next? Here are three actions you can do right now; take a look through a Managed Futures database for ideas, talk to a broker about opportunities that fit your situation, and listen to one of our many playlists that cover topics like why adding an investment may not always add value.. You never know, it may in fact concentrate your risk even more!

 

 

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

The programs listed here are a sub-set of the full list of programs able to be accessed by subscribing to the database and reflect programs we currently work with and/or are more familiar with.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history. Individuals cannot invest in the index itself, and actual rates of return may be significantly different and more volatile than those of the index.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

Limitations on RCM Quintile + Star Rankings

The Quintile Rankings and RCM Star Rankings shown here are provided for informational purposes only. RCM does not guarantee the accuracy, timeliness or completeness of this information. The ranking methodology is proprietary and the results have not been audited or verified by an independent third party. Some CTAs may employ trading programs or strategies that are riskier than others. CTAs may manage customer accounts differently than their model results shown or make different trades in actual customer accounts versus their own accounts. Different CTAs are subject to different market conditions and risks that can significantly impact actual results. RCM and its affiliates receive compensation from some of the rated CTAs. Investors should perform their own due diligence before investing with any CTA. This ranking information should not be the sole basis for any investment decision.

See the full terms of use and risk disclaimer here.

logo