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This paper studies the dynamic interaction between the net positions of traders and risk premiums in commodity futures markets. Short-term position changes are driven mainly by the liquidity demands of noncommercial traders, while long-term variation is driven primarily by the hedging demands of commercial traders. These two components influence expected futures returns with opposite signs. The gains from providing liquidity by commercials largely offset the premium they pay for obtaining price insurance.

For this study of the simple properties of commodity futures as an asset class, an equally weighted index of monthly returns of commodity futures was constructed for the July 1959 through December 2004 period. Fully collateralized commodity futures historically have offered the same return and Sharpe ratio as U.S. equities. Although the risk premium on commodity futures is essentially the same as that on equities for the study period, commodity futures returns are negatively correlated with equity returns and bond returns. The negative correlation is the result, primarily, of commodity futures' different behavior over a business cycle. Commodity futures are positively correlated with inflation, unexpected inflation, and changes in expected inflation. Imagine an asset class that has returns that (1) are the same as those on the U.S. stock market but (2) are less volatile than stock returns, (3) are negatively correlated with the returns on stocks and bonds, and (4) are positively correlated with inflation. The asset class is an investment in commodity futures. Despite being an old asset class, commodity futures are not widely appreciated. Futures contracts are agreements to buy or sell a commodity at a future date at a price that is agreed upon today. Except for collateral requirements, futures contracts do not require a cash outlay for either buyers or sellers. The buyer of a futures contract is, on average, compensated by the seller of futures if the futures price is set below the expected spot price at the time of the expiration of the futures contract. The opposite is true when the futures price is set above the expected future spot price. In 1930, John Maynard Keynes postulated that sellers of futures (hedgers) would, on average, compensate the buyers of futures (speculators)-a situation he referred to as \"normal backwardation.\" By examining the returns to futures over long periods, we indirectly tested this Keynesian prediction. We constructed a dataset of returns on individual commodity futures going back as far as 1959. The dataset combines information about individual commodity futures prices obtained from the Commodity Research Bureau (covering, among other exchanges, the Chicago Board of Trade and Chicago Mercantile Exchange) and the London Metal Exchange. We computed investment returns by rolling positions in individual futures contracts forward over time. Commodity futures were combined into an equally weighted index, and much of the article is concerned with the behavior of this index. We show that over a 45-year period, a diversified investment in collateralized commodity futures earned historical returns that are comparable to U.S. stock returns. The economic rationale for these returns is the reward that investors in commodity futures receive for providing price insurance to commodity producers. The reward for providing price protection (rather than foreseeable trends in commodity prices) is the key to the returns that a futures investor can expect. Individual commodity futures can be very volatile, but much of this volatility can be avoided by investing in a diversified index of commodity futures. The average historical returns to the equally weighted index of commodity futures has exceeded the return on U.S. T-bills by about 5 percent a year. This excess return is about the same as the historical risk premium on the S&P 500 Index over the 1959-2004 period, but the commodity futures index had a slightly lower standard deviation than the S&P 500. The relatively low volatility of the commodity futures index stems from the fact that the pairwise correlations between individual commodity futures are relatively low. Commodity futures are less risky by other standards. First, the distribution of commodity futures returns is skewed to the right, whereas equity return distributions are skewed to the left. In other words, relative to a normal bell-shaped curve, equities experience proportionally more crashes whereas the \"crashes\" in commodities most often occur on the upside, leading to positive returns to investors in commodity futures. Second, commodity futures have the ability to diversify portfolios of stocks and bonds. The sources of the diversification benefits are the ability of commodity futures to provide a (partial) hedge against inflation-stocks and bonds are poor hedges by comparison-and to partially offset the cyclical variation in the returns of stocks and bonds. Finally, when we compared an investment in our index with a portfolio of stocks of commodity-producing companies, we found that these portfolios are not close substitutes: The stocks of commodity producers are more correlated with the broad stock market than with an index of commodity futures.

We test a Wall Street investment strategy, \"pairs trading,\" with daily data over 1962-2002. Stocks are matched into pairs with minimum distance between normalized historical prices. A simple trading rule yields average annualized excess returns of up to 11% for self-financing portfolios of pairs. The profits typically exceed conservative transaction-cost estimates. Bootstrap results suggest that the \"pairs\" effect differs from previously documented reversal profits. Robustness of the excess returns indicates that pairs trading profits from temporary mispricing of close substitutes. We link the profitability to the presence of a common factor in the returns, different from conventional risk measures.

International equity markets exhibit medium-term return continuation. Between 1980 and 1995 an internationally diversified portfolio of past medium-term Winners outperforms a portfolio of medium-term Losers after correcting for risk by more than 1 percent per month. Return continuation is present in all twelve sample countries and lasts on average for about one year. Return continuation is negatively related to firm size, but is not limited to small firms. The international momentum returns are correlated with those of the United States which suggests that exposure to a common factor may drive the profitability of momentum strategies.

The factors that drive cross-sectional differences in expected stock returns in emerging equity markets are qualitatively similar to those that have been documented for developed markets. Emerging market stocks exhibit momentum, small stocks outperform large stocks, and value stocks outperform growth stocks. There is no evidence that high beta stocks outperform low beta stocks. A Bayesian analysis of the return premiums shows that the combined evidence of developed and emerging markets strongly favors the hypothesis that similar return factors are present in markets around the world. Finally, there exists a strong cross-sectional correlation between the return factors and share turnover.

The correlation structure of the world equity markets varied considerably over the past 150 years and was high during periods of economic integration. We decompose diversification benefits into two parts: one component due to variation in the average correlation across markets, and a another component due to the variation in the investment opportunity set. From this, we infer that periods of globalization have both benefits and drawbacks for international investors. Globalization expands the opportunity set, but as a result, the benefits from diversification rely increasingly on investment in emerging markets.

Investors face significant barriers in evaluating the performance of investment advisors. We focus on commodity trading advisors (CTAs) and show that from 1994 to 2012, CTA excess returns to investors (i.e., net of fees) were insignificantly different from zero while gross excess returns (i.e., before fees) were 6.1%, which implies that managers captured the performance in fees. Moreover, we find that CTAs display no alpha relative to simple future strategies in the public domain. Our results have implications for all hedge fund studies in that we find the typical adjustments for biases in the hedge fund databases still leave upward bias in fund performance.

This article reviews the literature on commodities from the perspective of an investor. We re-examine some of the early papers in the literature using recent data and find that the empirical support for the theory of normal backwardation as an explanation for the commodity risk premium is weak and that the evidence is more consistent with storage decisions. We then review the behavior of the main participants in the commodity futures markets with a particular focus on their impact on prices. Although there is continued disagreement in the literature about the role of speculative activity, our results show that money managers are generally momentum (positive feedback) traders, while producers are net short and contrarian (negative feedback) traders. There is less evidence that index traders and swap dealers trade based on past futures returns.

The authors examine the behavior of monthly commodity futures returns over the decade since 2004, when new investor inflows entered the asset class. They find that average returns have been similar to their long-term historical means. Correlations among commodities and commodity-equity correlations temporarily increased around the financial crisis, but have since returned to normal. This variation is linked to the business cycle rather than the financialization of the asset class.

During the 1980s, country effects were larger than industry effects in the equity markets of Western Europe. This phenomenon continued for the countries of the European Monetary Union in the 1993-98 period despite the convergence of interest rates and the harmonization of fiscal and monetary policies following the Maastricht Treaty of 1992. Today, no evidence supports the disappearance of differences between EMU countries' equity returns.