Value Investing for Commodities

Abstract

Although value investing is a thoroughly researched and applied investment style across numerous asset classes, little is known of this style within commodity futures investing. Probably the best-known application of value investing for commodities was put forward by Asness et al. (2013), but we initially found disappointing stand-alone results using their approach. The poor performance of the strategy is caused by large significant negative exposures to both carry and momentum factors. By using factor and sector neutrality, we show that the unwanted exposures can be removed. The resulting outperformance is both economically and statistically significant.

TOPICS: Commodities, analysis of individual factors/risk premia, factor-based models, style investing, futures and forward contracts

Key Findings

• • Although the standalone performance of the value factor for commodities by Asness et al. (2013) is weak, these results are explained by the factor going against carry and momentum. After correcting for these factor exposures, a considerable alpha emerges.

• • The value premium is fully driven by the selection of individual commodities within commodity sectors. Commodity sector exposures do not contribute to the factor’s performance and thus constitute a risk that is best neutralized by commodity value investors.

• • By neutralizing both the factor and sector exposures of the value factor, we achieved a Sharpe ratio of 0.79, a notable improvement compared to the 0.13 Sharpe ratio we found for the value factor by Asness et al. (2013).