The Handbook of Commodity Investing

CHAPTER 12

Some Thoughts on Risk Management for Commodity Portfolios

Jeffrey M. Christian

Managing Director

CPM Group

Commodities have been an integral part of the portfolios of many investors for centuries. Some investors have focused heavily on commodities, while others have used commodities as a subsector of a broader portfolio in which they allocate varying percentages of assets. Others have neglected or ignored commodities entirely.

Since the middle of the present decade, investment managers have focused increased attention on commodities as a part of a diversified portfolio. Others have rolled out investment funds specifically targeting investments. In some instances, these have been funds that only participate in futures, forwards, and options; in essence, these are variations of the commodity pools and commodity funds that have operated for decades in the futures markets, primarily in the United States. Other funds have taken a broader approach toward defining commodities investments, including, for example, equities of companies that produce commodities and options on such equities. Some funds have been created that are long-only commodities funds, in many ways similar to the natural resource equity mutual funds that also have been around since the 1970s.

The issue of managing risk in commodities portfolios depends in many ways on how one defines such commodities portfolios and their components. The risk management issues related to a long-only commodities futures and ...