Why Commodity Index Strategies are Active Investments

In the equity portfolio management, indexing strategies are considered to be passive portfolio management strategies, since a portfolio manager just needs to follow the index and no active management is required.

However, the same is not the case with commodity index strategies which are considered to be active strategies. This is so due to several reasons that require the portfolio manager to manage the portfolio actively:

  • Commodities index weighting change over time.
  • The manager needs to manage the size of exposures to various commodity markets because positions are rolled over. The rolling methodology of the index dictates the rolling frequency of the portfolio.
  • In order to maintain long exposure to changes in commodity prices, the manager will also need to close-out and re-establish derivative positions.
  • The manager also needs to manage the short-term debt used for collateral of derivative positions appropriately.

Note that the correlation between different subcategories of a commodity index is almost zero. For example, there will be little correlation between cotton futures and oil futures. This helps in maximizing the rebalance yield.

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