Intelligent Exposure to Commodities Markets
The Parametric Structured Commodity strategy is designed to capture a pure exposure to this asset class through a portfolio of commodity derivatives and risk-free collateral. Our commodity approach is built on the same key principles of our other structured portfolios − avoid concentrations, reduce volatility, and rebalance systematically. We carefully implement to avoid common pitfalls associated with trading commodity futures.
We include commodity contracts selected for their lack of correlation and use a tiered weighting system based on the liquidity of the underlying commodities. The members of each "liquidity tier" are assigned identical portfolio weights, and the weight assigned to each tier declines with the average liquidity of its members. Our objective is to create a higher growth rate with lower risk by employing a highly controlled rebalancing discipline to capture profits from volatility and low correlations.
Observations & Process
| Observation | Parametric Response |
|---|---|
| Mainstream indices contain concentrated exposures | Reweight contracts to construct a more diversified portfolio |
| Individual commodities are volatile and correlation between commodities is low | Exploit volatility through disciplined rebalancing |
| Trading rules for indices are well known and traded against | Construct trading rules which are flexible enough to avoid prediction by third parties |
| Avoiding contango / shorting a commodity is hard to consistently get right | Build a long-only portfolio to provide a broad-based exposure to the asset class |
Operational motivations for implementing with Parametric:
- Lower cost and more transparent than most commodity strategies
- Low risk collateral management
- Avoids non-commodity investments such as currency, emerging markets debt, and global macro strategies
