Implementing a multi-factor commodity strategy: a practitioner's approach

Factor approach is by no means confined to equities. The Invesco Global Asset Allocation also applies it to commodities in its latest research included in the Q4 2018 edition of Risk & Reward, where the team’s profound knowledge of equity factors provided a number of synergies. Over the period studied, the team’s commodity strategy exhibited an attractive return profile with no significant correlation to general commodity markets.

To the best of the team’s knowledge, the methodology employed differs from existing commodity factor research in two ways: First, rather than simply applying equity factor definitions to commodity markets, the team has incorporated the unique characteristics of commodity markets into factor construction. Second, the final portfolio is constructed using a risk parity framework along with several implementation considerations. Liquidity, leverage and turnover, which are largely overlooked in most factor research literature, are important implementation constraints.

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