How to Time the Commodity Market

Over the past few years, commodity prices have experienced the biggest boom in half a century. In this paper we investigate whether it is possible by active asset management to take advantage of the unique risk-return characteristics of commodities, while avoiding their excessive volatility. We show that observing (and learning from) the actions of different groups of market participants enables an active asset manager to successfully ‘time’ the commodities market. We focus on the information contained in the ‘Commitment of Traders (COT)’ report, published by the CFTC. This report summarizes the size and direction of the positions taken by different types of traders in different markets. Our findings indicate that there is indeed significant informational content in this report, which can be exploited by an active portfolio manager. Our dynamically managed strategies exhibit superior out-of-sample performance, achieving Sharpe ratios in excess of 1.0 and annualized alphas relative to the S&P 500 of around 15%. ∗Basu is from the Faculty of Finance, Cass Business School, while Oomen and Stremme are from the Department of Finance, Warwick Business School, Coventry CV4 7AL, United Kingdom. Oomen is also a research affiliate of the Department of Quantitative Economics at the University of Amsterdam, The Netherlands. Contact e-mail: [email protected]