Challenges in Commodities Risk Management

The recent outperformance of commodities versus equities has caused a positive re-evaluation of commodities by both retail and institutional investors. While the commodity markets provide a manager with ample opportunities for creating portfolios of diverse strategies, there are a number of challenges in doing so. In this article, the authors provide two examples of those challenges: (1) the correlations amongst commodities vary seasonally due to meaningful weather events, and (2) the entrée of China as a dominant force in the commodity markets has created new correlation footprints. The main implication of these observations is that risk management in the commodity markets is a very dynamic process.