Tail Risks and Commodity Prices – What comes next?
Recent times have been challenging for commodities and recent experience challenges rationales for commodity investment. But commodity markets are increasingly impacted by tail risks and this potential for tail risk events make commodities attractive investments. No other asset class responds so well and so protectively in times of heightened tail risks according to Edward L. Morse, Global Head of Commodity Research at Citigroup Global Markets.
But how do you take advantage of these tail risk opportunities?
- Commodity index investors effectively own insurance against tail risk events
- Investments are concentrated in prompt contract months, are unleveraged but can benefit from upticks in individual commodities exposed to tail risks
- Similarly, commodity investments can as a whole take advantage of rapid positive shifts in macro risk assessments (e.g. a shift in perceived systemic risks associated with successful Euro sovereign debt crisis management)
- Money managers and hedge funds seize tail risk opportunities through a different operation
- Investments are concentrated at the back end of the curve
- Investments are highly leveraged to changes in deferred prices
To find out more, download Edward’s presentation from last years World Commodities Week Europe conference