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Strategic Allocation to Commodity Factor Premiums

Last Updated on 10 February, 2024 by Rejaul Karim

In the paper “Strategic Allocation to Commodity Factor Premiums,” David Blitz of Robeco Quantitative Investments and Wilma de Groot of Robeco Asset Management present compelling insights into the commodity market’s factor premiums.

The study confirms the substantial presence of momentum, carry, and low-volatility factor premiums within the commodity market, emphasizing the significance of incorporating these factors into strategic asset allocation decisions.

The research demonstrates that diversified portfolios comprising commodity factor premiums exhibit markedly improved risk-adjusted performance compared to traditional commodity market portfolios, thereby enhancing the value of conventional stock/bond portfolios. In contrast, the study raises doubts about the role of the traditional commodity market portfolio in strategic asset mixes, suggesting a limited or negligible impact.

This research emphasizes the importance of promptly considering alternative commodity factor premiums in the investment process, offering valuable guidance for investors seeking to optimize their asset allocation strategies in the dynamic commodity market landscape.

Abstract Of Paper

In this study we confirm the existence of sizable momentum, carry and low-volatility factor premiums in the commodity market, and argue that investors should consider these commodity factor premiums when determining their strategic asset allocation. We find that diversified portfolios of commodity factor premiums exhibits a significantly better risk-adjusted performance than the commodity market portfolio and adds significant value to a conventional stock/bond portfolio. The traditional commodity market portfolio, on the other hand, appears to deserve little or no role at all in the strategic asset mix. Investors should therefore not postpone the consideration of alternative commodity factor premiums to a later stage of the investment process.

Original paper – Download PDF

Here you can download the PDF and original paper of Strategic Allocation to Commodity Factor Premiums.

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Author

David Blitz
Robeco Quantitative Investments

Wilma de Groot
Robeco Asset Management

Conclusion

In conclusion, the research by David Blitz and Wilma de Groot underscores the compelling potential of commodity factor premiums in influencing strategic asset allocation decisions.

The study’s confirmation of substantial momentum, carry, and low-volatility factor premiums in the commodity market highlights the need for investors to integrate these factors into their asset allocation strategies.

Diversified portfolios comprising commodity factor premiums demonstrate significantly enhanced risk-adjusted performance compared to traditional commodity market portfolios, thereby presenting an opportunity to add substantial value to conventional stock/bond portfolios.

Conversely, the study indicates a limited or negligible role for the traditional commodity market portfolio in strategic asset mixes. As such, the research advocates for the timely consideration of alternative commodity factor premiums in the investment process, offering valuable guidance for investors seeking to optimize their asset allocation strategies in a dynamic and evolving market landscape.

Related Reading:

Benchmarking Commodity Investments

Fear of Hazards in Commodity Futures Markets

FAQ

Q1: What are the key factor premiums identified in the commodity market according to the research, and why are they significant for strategic asset allocation?

A1: The research identifies sizable momentum, carry, and low-volatility factor premiums in the commodity market. These factors are considered significant for strategic asset allocation as they provide opportunities for investors to enhance risk-adjusted performance by incorporating these premiums into their portfolios.

Q2: How do diversified portfolios of commodity factor premiums compare to traditional commodity market portfolios in terms of risk-adjusted performance?

A2: Diversified portfolios of commodity factor premiums exhibit significantly better risk-adjusted performance compared to traditional commodity market portfolios. The study suggests that incorporating commodity factor premiums adds substantial value to conventional stock/bond portfolios, emphasizing the importance of considering these factors in strategic asset allocation decisions.

Q3: What role does the research suggest for the traditional commodity market portfolio in strategic asset mixes, and what recommendation does it provide to investors regarding commodity factor premiums?

A3: The study raises doubts about the role of the traditional commodity market portfolio in strategic asset mixes, suggesting a limited or negligible impact. The research recommends that investors should not postpone the consideration of alternative commodity factor premiums to a later stage of the investment process, emphasizing the importance of promptly integrating these factors for optimal asset allocation strategies.

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