Generating Alpha and Managing Beta

in the Global Commodity Markets

Commodities have been traded by mankind since time immemorial. Legend has it that the ancient Chinese traded rice futures over 6000 years ago. The first modern organized exchanges trading commodity derivatives were launched in the 18th century in Japan.

Some of the most memorable transactions of all time have involved commodities. Jay Gould famously cornered the US gold market during the presidency of Ulysses S. Grant. John Arnold, popularly known as the “King of Natural Gas”, was rumored to be responsible for trading a third of the US natural gas market every day at the turn of the century. Speculation by George Soros in shorting the British pound in 1992 led to the trade that broke the Bank of England.

Fast forward to today. Technology, innovation and regulatory changes continue to dramatically alter the global financial markets. Although every asset class has been affected by the evolution in market structure, we are seeing some interesting trends in commodities due to this asset class having traits that make it very different from financial assets.