LONG-SHORT COMMODITY INVESTING
is done by testing whether the increase in the long, as well as short, interests of speculators caused a change in the conditional volatility of long-short commodity portfolios or a change in the conditional correlation between their returns and those of traditional assets. Our Granger-causality tests are tests of the null hypothesis that changes in the positions of long-short investors do not cause changes in the volatility of the long-short commodity portfolios or have no impact on their conditional correlation with traditional assets. A failure to reject the null hypothesis indicates a lack of causality. We find no support for the hypothesis that long-short investors
have destabilised commodity prices by increasing volatility or co- movements between commodity prices and those of traditional assets. Interestingly, this conclusion holds irrespective of whether investors are labelled as ‘non-commercial’ in the CFTC Commitment of Traders report or ‘professional money managers’ (i.e., CTAs, CPOs and hedge funds) in the CFTC disaggregated Commitment of Traders (DCOT) report. Thus, the analysis presented here does not call for a change in the regulation in relation with the increased participation of professional money managers in commodity futures markets.
Conclusion This study confirms the relevance of commodity
futures investment and documents the benefits of adopting long-short strategies in terms of risk- adjusted performance, diversification and extreme- risk hedging. It also finds no support for the contention
that long-short investors have destabilised commodity markets by increasing volatility or co-movements between the prices of commodity futures investments and those of traditional assets. The results on the performance and risk
characteristics of long-only and long-short commodity futures investing have important practical consequences for investors that are considering or have implemented commodity investment programmes. The new-found evidence on the impact of
the financialisation of commodity futures markets challenges the assumptions of a politically and sometimes emotionally charged debate and will be of relevance not only to regulators and industry associations but also to institutional investors whose investment committees need to factor social responsibility considerations into their investment decisions. •
Joëlle Miffre is Professor of Finance at EDHEC Business School and a member of the EDHEC Risk Institute. Her
research focuses on asset management, with special emphasis on commodities, equities, active strategies and asset pricing.
www.edhec-risk.com
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