Commodity Derivatives, 2nd Edition

CHAPTER 14Commodity Investing

14.1 COMMODITY INVESTORS

There is a broad range of potential commodity investors which includes the following participants:

• Investment banks and hedge funds – also sometimes referred to as ‘leveraged’ accounts in that they are typically allowed to borrow to finance their activities.
• Private bank and retail sector – the most popular choice of instrument would either be a mutual fund/unit trust or an exchange traded product (ETP).
• Real money accounts – this sector encompasses institutional investors (e.g. mutual fund/unit trust fund managers, insurance companies, and pension funds) who have restrictions on their ability to borrow. Their investment activities are longer‐term in nature and are characterised as being one of ‘buy and hold’.
• Commodity trading advisors – these investors typically use futures to gain exposure to a particular sector of the commodities market. Their investment activities may not be restricted to just commodities and may include exposures to other asset classes.
• Sovereign wealth funds – Perhaps seeking to diversify their holdings into long‐term strategic investments.

Figure 14.1 conveys a sense of the different investment horizons for each of the main participants.

In terms of typical strategies and popular investment structures it may be possible to make some generalisations:

Up to one year

• This would capture tactical trades or strategies that arise opportunistically. For example, if an investor believes that a particular ...