CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

25.2 DIRECTIONAL STRATEGIES

Directional strategies are strategies that express a view on market direction, resulting in either long or short positions. While these strategies can be implemented with traditional assets, such as the equities of commodity firms or commodity-based exchange-traded funds (ETFs), they more often utilize listed commodity futures and options as well as over-the-counter (OTC) derivatives, such as forward contracts or swaps. Some strategies also involve holding physical commodities, though this is much less common. Further details on the investment vehicles available for the implementation of directional strategies can be found in Chapter 6, which discusses accessing commodity beta.

Fundamental directional strategies are based on an analysis of supply-and-demand factors for commodities or commodity sectors. They can be based on macroeconomic factors such as economic growth, interest rate forecasts, and currencies, or on industry-specific factors, such as the number of cattle in feedlots.

Quantitative directional strategies use technical or quantitative models to identify overpriced and underpriced commodities. These strategies are similar to managed futures strategies discussed in Chapters 9 to 32.