Commodities (COM)

Commodities are often treated as “inflation hedge.” Institutionally, they are underwritten as curve dynamics + collateral management + liquidity. Returns can come from spot price moves, carry/roll yield, or trading skill. The distinction between commodity beta and specialized commodity trading is central.

From an allocator perspective, commodities affect:

• inflation sensitivity,
• portfolio crisis behavior,
• liquidity and leverage mechanics, and
• roll yield and curve risk.

How allocators define commodities risk drivers

Allocators segment commodities exposure by:

• Commodity group: energy, industrial metals, precious metals, agriculture/softs
• Exposure type: futures beta, physical exposure, offtake, trading/relative value
• Curve structure: contango/backwardation and roll yield impacts
• Collateral and leverage: margining, drawdown controls, liquidity buffers
• Liquidity and market depth: stress liquidity and position sizing realism
• Regime risk: geopolitical shocks, supply disruptions, policy changes
• Disambiguation: exclude “commodity SaaS”; require physical/market evidence (“offtake,” “physical metals,” “futures”)
• Evidence phrases: “offtake agreements,” “physical,” “futures,” “commodity trading,” “roll yield”

Allocator framing:
“Is this exposure a deliberate inflation/real asset hedge with understood curve mechanics—or a leveraged directional bet with fragile collateral dynamics?”

Where commodities sit in allocator portfolios

• diversification sleeve for inflation and supply-shock hedging
• used tactically or strategically depending on mandate
• often combined with natural resources and real assets allocations

How commodities impact outcomes

• can hedge inflation and supply shocks in certain regimes
• can underperform during contango-heavy periods due to negative roll yield
• can face sharp drawdowns and margin stress if leverage is mishandled
• trading strategies can add idiosyncratic returns but require proof of skill

How allocators evaluate commodities managers

Conviction increases when managers:

• explain return drivers: spot vs carry vs relative value skill
• manage collateral and drawdowns conservatively (no forced liquidations)
• show performance across multiple curve regimes (contango/backwardation cycles)
• provide transparent exposure, risk budgets, and stress testing
• demonstrate operational capability for physical or structured exposures if used

What slows allocator decision-making

• unclear return driver attribution
• leverage dependence without robust collateral controls
• limited evidence across different curve regimes
• mismatch between liquidity assumptions and actual market depth in stress

Common misconceptions

• “Commodities always hedge inflation” → hedge effectiveness varies by regime and curve.
• “Futures exposure equals physical exposure” → roll yield and curve dynamics matter materially.
• “Commodity trading is just beta” → true trading requires demonstrable skill and risk discipline.

Key allocator questions

• What are the return drivers (spot, carry, trading) and how stable are they?
• How do you manage collateral, margin, and drawdown risk?
• How does performance behave in contango vs backwardation regimes?
• What is liquidity profile and stress exit feasibility?
• What is the role: strategic hedge or tactical return sleeve?