Hedging pressure-based long/short commodity strategy used for third generation commodity index

Case for long/short commodity indexes

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There are many reasons why commodity indexes are useful tools for strategic asset allocation. First, their risk-return trade-off has been shown to be comparable to that of equity indexes (Erb and Harvey, 2006; Gordon and ­Rouwenhorst, 2006).

Second, they have low return correlation with traditional asset classes and so are useful tools for risk diversification (Erb and Harvey, 2006; Gordon and Rouwenhorst, 2006).

Third, unlike stocks and bonds, commodity prices rise in inflationary periods, making