The Handbook of Commodity Investing

CHAPTER 20

Active Management of Commodity Investments: The Role of CTAs and Hedge Funds

R. McFall Lamm, Jr., Ph.D.

Chief Investment Strategist

Global Investment Management

Deutsche Bank

Commodity investment has moved to the forefront of portfolio management over the past few years, largely in response to strong outperformance versus stocks and bonds. Supporters promote commodities as a new asset class, which they believe should further reward investors in the future as a new “super cycle” unfolds. In contrast, skeptics argue that commodity prices have a tendency to mean-revert and are wary of committing at what may be the late phase of the current cyclical upturn.

Regardless of one's view about the immediate future of commodities, most practitioners now acknowledge that there are circumstances when tactical commodity allocations make a great deal of sense. In this chapter, I presume the commodity investment decision has been made to the affirmative and focus on the mechanics of position implementation. While my major concern is the efficacy of active commodity-specialist managers, this necessarily requires considering benchmarks since the active/passive manager split is interdependent.

Because increased interest in commodity investing is a recent phenomenon, the population of active commodity managers competing against benchmarks is sparse. Consequently, in keeping with prior research, I define active commodity management to include commodity trading advisors (CTAs) and hedge funds ...