Risk & Reward

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In this paper we propose a commodity strategy that incorporates cross-sectional factors grounded in the rich research available on commodity futures pricing. Over the period studied, the strategy exhibited an attractive return profile with no significant correlation to general commodity markets. To the best of our knowledge, the methodology employed differs from existing commodity factor research in two ways: First, rather than simply applying equity factor definitions to commodity markets, we have incorporated the unique characteristics of commodity markets into factor construction. Second, the final portfolio is constructed using a risk parity framework along with several implementation considerations. Liquidity, leverage and turnover, which are largely overlooked in most factor research literature, are important implementation constraints.