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The Journal of Alternative Investments

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The Case for Long-Short Commodity Investing

Joëlle Miffre and Adrian Fernandez-Perez
The Journal of Alternative Investments Summer 2015, 18 (1) 92-104; DOI: https://doi.org/10.3905/jai.2015.18.1.092
Joëlle Miffre
is a professor of finance at the EDHEC Business School in Nice, France.
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  • For correspondence: Joelle.Miffre@edhec.edu
Adrian Fernandez-Perez
is a research fellow at Auckland University of Technology in Auckland, New Zealand.
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  • For correspondence: adrian.fernandez@aut.ac.nz
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Abstract

The article presents strong evidence in favor of long-short (as opposed to long-only) commodity investments. We show that long-short fully collateralized commodity portfolios based on momentum, term structure or hedging pressure present higher Sharperatios, lower volatility and lower correlation with the S&P 500 index than long-only commodity portfolios. Besides long-short hedging pressure portfolios serve as partial hedge against extreme equity risk as they present decreasing correlations with the S&P 500 index in periods of heightened equity volatility. This is good news to equity investors: it is precisely when the volatility of equity markets is high that the benefits of diversification are most appreciated. In contrast, the conditional correlation between the S&P 500 and long-only commodity indices substantially rises with the S&P 500 volatility, suggesting that the risk diversification of long-only commodity portfolios prevails less when needed most.

TOPICS: Commodities, portfolio construction, risk management, statistical methods

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The Journal of Alternative Investments: 18 (1)
The Journal of Alternative Investments
Vol. 18, Issue 1
Summer 2015
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The Case for Long-Short Commodity Investing
Joëlle Miffre, Adrian Fernandez-Perez
The Journal of Alternative Investments Jun 2015, 18 (1) 92-104; DOI: 10.3905/jai.2015.18.1.092

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The Case for Long-Short Commodity Investing
Joëlle Miffre, Adrian Fernandez-Perez
The Journal of Alternative Investments Jun 2015, 18 (1) 92-104; DOI: 10.3905/jai.2015.18.1.092
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