With the CTA Expo returning in September, I decided to share some thoughts from my 40 years of commod market experience. These are some of what I think to be MAJOR MISCONCEPTIONS in commodity markets, some repetitive and presented in no particular order:
COMMODITY FUTURES MYTHS:
- Roll yield exists, negative or otherwise.
- Rolling futures in contango will result in a loss.
- Investors will lose money if a market is in “contango”.
- Investors will profit if a market is in “backwardation”.
- Losses or gains are incurred within an account by rolling from one contract to another.
- Commodity futures prices converge to spot over time.
- Commodity prices are “mean reverting”.
- Spot indexes are appropriate benchmarks for investment.
- Spot returns equal the return achieved from purchasing physical commodities.
- Investors should choose hedge fund managers to make money in commodity markets.
- Investors should choose commodity ETFs to make money in commodity markets.
- Cost of carry means you start at a loss.
- Commodity traders differ from traders in bonds and stocks.
- Commodity traders are not buy and hold investors.
- Commodity traders are not biased to the long side.
- Commodity sources of return are spot, collateral and roll yield.
- Negative roll yield is the reason for legacy commodity index underperformance.
- Commodities are leveraged investments.
- Commercial traders are short, specs use trend following strategies.
- Commercials make money, specs lose money.
- Commodity trading volume confirms price.
- Long only is a failed strategy.
- Legacy commodity indices are meaningful benchmarks.
- Commodity indexes are bad.
- Newly hatched “third generation” commodity indexes are better than the old ones.
- Continuation data is valid.
- Most academic studies don’t have serious data issues and flawed results.
- Legacy commodity indexes are not negative momentum strategies.
- Negative roll yield hurts UNG.
- Commodity ETFs have low tracking error.
- You can't get out of limit down market
- Long-dated futures predict prices.
None of the above are true. Much of the above are dogma and repeated often by traders and academics alike.
Before accepting any rule of thumb in commodity trading, dowload actual contract closing prices and consider each roll as an entirely new position. Accounting for margin is always problematic. Every investor has a differenct capital position. Assuming fully collateralized positions at all times WILL affect your cash account as cash is added or withdrawn to maintain full collateralization. Since each new position creates a new basis, cash has NO effect on return. The way the CFTC requires CTAs and Pools to report will show different returns for the exact same positions depending upon the cash account. All fully collateralized (not over, not under) accounts with the same positions will post the same results.