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The Handbook of Commodity Investing by DIETER G. KAISER, ROLAND FÜSS, FRANK J. FABOZZI

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CHAPTER 17

How to Design a Commodity Futures Trading Program

Hilary Till

Principal

Premia Capital Management, LLC

Joseph Eagleeye

Principal

Premia Capital Management, LLC

We provide a step-by-step primer on how to design a commodity futures trading program. A prospective commodity manager not only must discover trading strategies that are expected to be generally profitable, but also must be careful regarding each strategy's correlation properties during different times of the year and during eventful periods. He or she also must ensure that the resulting product has a unique enough return stream that it can be expected to provide diversification benefits to an investor's overall portfolio.

When designing a commodity futures trading program, a commodity manager needs to create an investment process that addresses these steps:

  1. Trade discovery
  2. Trade construction
  3. Portfolio construction
  4. Risk management
  5. Leverage level
  6. How the program will make a unique contribution to the investor's overall portfolio

This chapter covers each of these subjects in succession.

TRADE DISCOVERY

The first step is to discover a number of trades in which it is plausible that the investor has an “edge” or advantage. Although a number of futures trading strategies are well known and publicized, commodity managers continue to apply them. Three examples of such strategies follow.

Grain Example

In discussing consistently profitable grain futures trades, Cootner stated that the fact that they “persist in the face ...

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