Understanding Liquid Alternatives
Commodities Strategies
What Are Commodity Strategies?
Commodity strategies in liquid alternatives focus on capturing return opportunities across a wide range of physical and financial commodities. These include sectors like energy, agriculture, metals, and livestock, accessed primarily through futures contracts and other liquid derivatives.
These strategies may pursue long-only exposure, long-short approaches, or more complex arbitrage and relative value trades, depending on the manager’s objective. They have the potential to serve as a hedge against inflation, a diversifier from traditional asset classes, and a source of alternative alpha.
How It Works
Commodity strategies may be actively managed or systematically driven, depending on the investment philosophy.
- Instruments: Primarily commodity futures, with possible use of swaps or ETFs.
- Approaches: Trend following, fundamental, or relative value.
- Markets: Energy (oil, gas), metals (gold, copper), agriculturals (grains, coffee, soybeans), livestock (cattle, hogs), and alternative liquids (carbon credits, water futures)
Potential Benefits of Commodity Exposure
- Inflation Hedge: Commodity prices often rise during inflationary periods.
- Diversification: Low correlation to equities and fixed income.
- Global Macro Sensitivity: React to real-world supply and demand dynamics.
- Tactical Opportunity: Prices influenced by weather, geopolitics, seasonality, and technology.
Key Risks
- Volatility: Prices may be highly reactive to short-term news and events.
- Roll Costs: Futures-based strategies may incur costs when contracts are rolled.
- Leverage: Futures exposure magnifies gains and losses.
- Event Risk: Weather, regulation, and geopolitical shifts can impact specific markets suddenly.
Commodities vs. Managed Futures
Commodity strategies may complement Managed Futures by offering more focused exposure to supply-driven themes and inflation-linked assets.
| Feature | Commodities | Managed Futures |
|---|---|---|
| Asset Focus | Physical/derivative commodity markets | Multi-asset global futures |
| Investment Objective | Thematic, inflation hedging, alpha | Trend following, diversification |
| Return Driver | Supply-demand fundamentals | Systematic trend signals |
| Exposure Type | Often sector-specific | Broad asset class exposure |
Source: AQR. For informational purposes only. The comparisons herein are not exhaustive and do not address all relevant features, risks, or considerations associated with the strategies discussed. Investors should conduct their own due diligence before making any investment decision.
Who Typically Uses Commodity Strategies?
- Investors seeking real asset exposure.
- Portfolios hedging against inflation shocks.
- Tactical allocators responding to macro trends or commodity cycles.
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DISCLOSURES
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The information contained on this website has been provided solely for information purposes and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. The information on this site is directed only at persons or entities in any jurisdiction or country where such access to information contained on this website and use of such information is not contrary to local law or regulation. Accordingly, all persons who access this website are required to inform themselves of and to comply with any such restrictions. Past performance is not a guarantee of future performance.
There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially and should not be relied upon as such.
View definitions of benchmarks and other terms used here.
The investment strategy and themes discussed herein may not be in the best interest of investors depending on their specific investment objectives and financial situation.
Diversification does not eliminate the risk of experiencing investment losses. There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments. Before trading, investors should carefully consider their financial position and risk tolerance to determine if the proposed trading style is appropriate. Investors should realize that when trading futures, commodities, options, derivatives and other financial instruments one could lose the full balance of their account. It is also possible to lose more than the initial deposit when trading derivatives or using leverage. All funds committed to such a trading strategy should be purely risk capital.
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