The DBLCI is constructed from six commodities: sweet light crude oil, heating oil, aluminium, gold, wheat and corn. Within this base index, each commodity has a constant weighting that reflects world production and inventory. The mean-reverting index incorporates variable weights that are dependent on price deviations from long-term averages. This feature should appeal to investors that want to lower their returns’ volatility.
"DBLCI-MR is the first index to use the mean reversion of commodities to generate investment returns," said Kerim Derhalli, London-based global head of commodities at Deutsche Bank, who added that the creation of total return indexes is part of the German bank’s effort to use its derivatives expertise to increase use of commodities as an alternative asset class.
The German bank claimed its indexes' back-tested returns "outstrip those of rival indexes". A handful of dealers offer commodity index products, and Goldman Sachs’ product is believed to be the most widely used among investors. The average annualised return between 1988 and 2002 of the DBLCI and DBLCI-MR would have been 10.7% and 11.9%, respectively, according to Deutsche.
The week on Risk.net, November 25-December 1, 2016Receive this by email