————————

An EDHEC-Risk Institute Working Paper

Commodity Trading
Strategies: Examples,
Mistakes, and Famous
Debacles
December 2019

————————
 Introduction
4

Commodity Trading Strategies

4
Common Mistakes
7

Famous Debacles
9

Conclusion
19

References
19

About EDHEC-Risk Institute

21

EDHEC-Risk Institute
Publications and Position
Papers (2016-2019)
26
Portfolio weights
back to their original
weights, can be a
source of additional
performance.

The co-author of this paper, Ms. Hilary Till, presented this research at (1) ESSEC Business School’s Energy and Commodity Finance
Research Center (France) on June 12, 2017; (2) the Commodity and Energy Markets Conference at Oxford University on June 15,
2017; and at (3) a Cass Business School (City, University of London) Finance Research Workshop on June 16, 2017.

In addition, the analysis of the MF Global debacle was later referenced by Harvard Law School’s Bankruptcy Roundtable, and some
of the content of this working paper was also included in Till et al. (2018).

›2 ›2 EDHEC 2019.
Printed in France, December 2019. Copyright
The opinions expressed in this study are those of the authors and do not necessarily reflect those of EDHEC Business School.
ABOUT THE AUTHORS
————————

Mr. Joseph Eagleeye is a principal of Premia Research LLC where he co-created the
Premia Bancor Index, which is a smart commodity-oriented beta that is calculated
and distributed by S&P Dow Jones Indices. In addition to Premia, Mr. Eagleeye is
a consultant to Organic Valley, the nation’s second largest organic dairy producer
where he is creating a risk management framework for their core business. His
previous consulting assignments were with Morgan Stanley where he was an
investment risk manager for the firm’s $2-trillion wealth management portfolio
and with Merrill Lynch Investment Management in their risk management group
where he advised on benchmark construction, hedging strategies, index replication
strategies, portfolio construction, performance attribution and risk management.
Previously, Mr. Eagleeye was a senior derivatives strategist at Putnam Investments.
While at Putnam, Mr. Eagleeye researched, back-tested and implemented systematic,
relative-value derivative strategies, which spanned the bond and commodity
markets, as well as co-managing Putnam’s institutional commodity program.
Prior to joining Putnam Investments, Mr. Eagleeye developed programmed trading
applications for Morgan Stanley’s Equity Division. Mr. Eagleeye holds a B.S. in
Applied Mathematics from Yale University and an MBA from the University of
California at Berkeley. He holds a B.S. in Applied Mathematics from Yale University
and an MBA from the University of California at Berkeley.

Hilary Till is co-founder and principal of Premia Capital, a proprietary investment

and research firm focused on the natural resources futures markets. At Premia, Till
created a systematic investment process with elements including trade discovery,
trade construction, strategy bucketing, dynamic correlation analysis, portfolio
construction, risk management, event-risk analysis and macro portfolio hedging.
In 2007, she co-edited the book Intelligent Commodity Investing with Premia
colleague Joseph Eagleeye. In addition, Till is a principal of Premia Risk Consultancy,
Inc., which provides advice on complex financial topics to institutional investment
firms. Till presented her research on oil price formation to the Oil Industry and
Markets Division of the International Energy Agency in March 2009. She also
advises on portfolio management, fund governance and natural-resources
investing as well as on derivatives hedging strategies and risk management policies.
In 2003, Till was awarded a grant by the Foundation of Managed Derivatives
Research to review prominent hedge fund research for a peer-reviewed journal.
Till also serves on the North American advisory board of the London School of
Economics; is a research associate at the EDHEC-Risk Institute; is a Fellow at the
Arditti Center for Risk Management,DePaul University; and is a member of the
steering committee for the Chicago chapter of the Professional Risk Managers'
International Association. In 2011, she was named to the Federal Reserve Bank
of Chicago’s Working Group on Financial Markets.

An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019 ›3
 Introduction globally on a 24-hour basis. Trend-followers try to
This paper provides a reasonably comprehensive tour of capture long-term trends, typically between 1 and 6
the always dynamic and frequently opaque commodity months in duration when they occur.” Trend-followers
markets, including views on (1) commodity trading will scan the markets with quantitative screens
strategies, (2) common mistakes, and (3) two famous designed to detect a trend. Once the model signals
debacles. The specific types of commodity trading a trend, a trade will be implemented. Successful
strategies that are included are trend-following and trend-followers curb losses on losing trades and let
calendar-spread trading. the winners ride. That is, they quickly exit false trends
and lever into real trends, which is the distinguishing
feature amongst trend-following CTAs. In a sense,
Commodity Trading Strategies alpha may come from this dynamic leverage. As Fung
Although there are two basic types of Commodity and Hsieh (2003) explained, “trend-following alpha
Trading Advisors, discretionary and trend-following, will reflect the skill in leveraging the right bets and
the investment category is dominated by trend- deleveraging the bad ones as well as using superior
followers. More than 70% of managed futures funds entry/exit strategies. Negative alphas will be accorded
are estimated to rely on trend-following strategies. to those managers who fail to lever the right bets and
Trend-followers are also known as systematic traders. show no ability in avoiding losing bets irrespective of
The operative word here is systematic. Automated the level of overall portfolio return – luck should not
programs screen the markets using various technical be rewarded.”
factors to determine the beginning or end of a trend
across different timeframes. “The trading is based on One interesting aspect of trend-following CTAs is that
the systematic application of quantitative models each individual trade may have quite a small return
that use moving averages, break-outs of price ranges, relative to its volatility. But by combining numerous
or other technical rules to generate the buy and sell markets that are lowly correlated with one another,
signals for a set of markets,” explained Lungarella one has the advantage of the returns of each trade
(2002). being additive while the overall portfolio’s volatility is
ever more dampened with the addition of each lowly
As put forward by Rulle (2003), “A trend-following correlated market. An AQR Capital Management white
program may trade as many as 80 different markets paper showed how persistent momentum profits have
Figure 1
Hypothetical Performance of Time Series Momentum
Strategy performance after simulated transaction costs both gross and net of hypothetical 2-and-20 fees.
Time Period Gross of Fee Net of 2/20 Realized Sharpe Ratio, Correlation to S&P Correlation to US
Returns Fee Returns Volatility Net of Fees 500 Returns 10-year Bond
(Annualized) (Annualized) (Annualized) Returns
Full Sample:
Jan 1903 - June 2012 20.0% 14.3% 9.9% 1.00 -0.05 -0.05
By Decade:
Jan 1903 - Dec 1912 18.8% 13.4% 10.1% 0.84 -0.30 -0.59
Jan 1913 - Dec 1922 17.1% 11.9% 10.4% 0.70 -0.12 -0.11
Jan 1923 - Dec 1932 17.1% 11.9% 9.7% 0.92 -0.07 0.10
Jan 1933 - Dec 1942 9.7% 6.0% 9.2% 0.66 0.00 0.55
Jan 1943 - Dec 1952 19.4% 13.7% 11.7% 1.08 0.21 0.22
Jan 1953 - Dec 1962 24.8% 18.4% 10.0% 1.51 0.21 -0.18
Jan 1963 - Dec 1972 26.9% 19.6% 9.2% 1.42 -0.14 -0.35
Jan 1973 - Dec 1982 40.3% 30.3% 9.2% 1.89 -0.19 -0.40
Jan 1983 - Dec 1992 17.8% 12.5% 9.4% 0.53 0.15 0.13
Jan 1993 - Dec 2002 19.3% 13.6% 8.4% 1.04 -0.21 0.32
Jan 2003 - June 2012 11.4% 7.5% 9.7% 0.61 -0.22 0.20
Source: Hurst et al. (2012), Exhibit 1.

›4 An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019
been across time and across asset classes (Hurst et al., “However, the … strategy also exposed investors
2012). This is shown in Figure 1. to large losses … during both [historical] periods,”
noted the Federal Reserve Bank of Chicago paper.
AQR constructed a simple momentum strategy as Interestingly, “[m]omentum … [losses] were [apparently]
follows. They created “an equal-weighted combination predictable.” In both historical periods, losses were
of 1-month, 3-month, and 12-month momentum “more likely when momentum recently performed
strategies for 59 markets across 4 major classes – 24 well.” For the 1867 to 1907 period, losses were more
commodities, 11 equity indices, 15 bond markets, and likely when “interest rates were relatively low.” And
9 currency pairs – from January 1903 to June 2012,” for the 1927 to 2012 period, losses were more likely
explained Hurst et al. (2012). when “momentum had recently outperformed the
stock market”. Each of these periods were “times when
Excerpting further from the AQR authors’ white paper: borrowing or attracting return chasing ‘blind capital’
“Since not all markets have return data going back would have been easier.” The authors argue that the
to 1903, … [they constructed] the strategies using periodic large losses, associated with the strategy
the largest number of assets for which return data plausibly becoming too popular, “play an important
exist[ed] at each point in time.” They used “futures role in sustaining” the momentum strategy’s historical
returns when … available.” And then “[p]rior to the returns.
availability of futures data,” they used “cash index
returns financed at local short rates for each country” The Federal Reserve Bank of Chicago paper raises the
as proxies for futures returns. Each position was sized question that a sizeable fraction of investors might not
to “target the same amount of volatility” and “positions capture the documented, historical (but hypothetical)
across the three strategies … [were] aggregated each returns of momentum strategies since they may only
month, and scaled such that the combined portfolio enter the strategy after it has done well and then exit
… [had a] volatility target of 10%,” explained Hurst it once it has performed poorly. This explains why a
et al. (2012). strategy can potentially continue to exist, even if
well known: investors may not be able to tolerate the
In viewing Figure 1, Hurst et al. (2012) note that periodic interim drawdowns, especially if they do not
“[t]rends appear to be a pervasive characteristic of have a firm grasp on why a black-box strategy should
speculative financial markets over the long term.” The be profitable.
AQR authors theorized that “price trends exist in part
due to long-standing behavioral biases exhibited by In contrast to highly scalable CTA programs, proprietary
investors, such as anchoring and herding, as well as futures traders often specialize in understanding the
the trading activity of non-profit seeking participants, factors that impact the spread between two (or more)
such as central banks and corporate hedging programs.” of a commodity futures contract’s delivery months.
These traders engage in calendar-spread trading. By
For further long-term evidence that momentum might way of further explanation, in all commodity futures
be a structural characteristic of markets, one can markets, a different price typically exists for each
consider a Federal Reserve Bank of Chicago working commodity, depending on when the commodity
paper on equities that examined the profitability of is to be delivered. For example, with natural gas, a
momentum strategies in late Victorian-era England futures contract whose delivery is in October will
and during most of the past eight-and-half decades have a different price than a contract whose delivery
in the United States. Chabot et al. (2014)’s particular is in December. Accordingly, a futures trader may
momentum strategies “earned abnormally high trade the spread between the October vs. December
risk-adjusted returns … between 1927 and 2012 futures contracts. Calendar spread opportunities arise
[amongst U.S. equities] and [also] … between 1867 when a seemingly predictable one-sided commercial
and 1907 ... [amongst English equities].” or institutional interest exists in particular futures

An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019 ›5
 Figure 2

Sources of data: The Bloomberg and U.S. Energy Information Administration.

contracts: a proprietary trader will thereby take the be sold and a further-maturity contract should be
other side of this “flow.” Examples of one-sided flow bought. In advance of such a procedure, speculators
have occurred during seasonal inventory build-and- in some commodity futures contracts have historically
draw cycles and also during the scheduled times when sold the front-month while buying the next-month
futures contracts are rolled in commodity indices. To contract, establishing what is known as a bear-calendar
the extent that commercial hedging activity causes spread. They would then unwind this position during
trends in calendar spreads, a speculator can potentially index roll dates.
have a profitable edge in taking the other side of these
trades. Figure 2 shows the seasonal inventory build- In examining the level of fees that funds are able to
and-draw pattern of natural gas from 1994 to 2015. charge for moving the return distribution of an asset
class to the right, one might conclude that investors
The prices of summer and fall futures contracts highly prize positive skewness. Indeed, many investors
typically trade at a discount to the winter contracts. expect long-options-like profiles from Commodity
The markets thus provide a return for storing natural Trading Advisors and from global macro hedge fund
gas. An owner of a storage facility can buy summer managers. A long-options-like payoff profile is one
natural gas and simultaneously sell winter natural gas where there is a truncated downside with the possibility
via the futures markets. This difference is the storage of infrequent, but large gains, as shown in the chart
operator’s return for storage. When the summer in Figure 3 on the next page. Figure 3 is a histogram
futures contract matures, the storage operator can of historical CTA returns.
take delivery of the physical natural gas, and inject
this natural gas into storage. Later when the operator’s Figure 4 on the next page shows an example crude oil
winter futures contract matures, the operator can make futures trading strategy that has a collar-like profile
delivery of the physical natural gas by drawing physical on crude oil futures returns. Collars are a combination
natural gas out of storage for this purpose. As long option strategy of owning long out-of-the-money
as the operator’s financing and physical outlay costs puts financed by selling out-of-the-money calls on
are under the spread locked in through the futures an asset class that an investor owns. Figure 4 shows
market, this operation will be profitable. Now to the how, across quartiles of Brent oil futures returns, a
extent that the hedging activity by storage operators particular trading strategy essentially gave up the
causes trends in calendar spreads, a speculator can possibility of very large returns in crude oil in exchange
potentially have a profitable edge in taking the other for avoiding quite negative returns on a Brent crude
side of these trades. oil futures position.

Another type of calendar-spread trading has arisen One typically finds that institutionally-scaled futures
from commodity index rules. Commodity index rules programs employ trend-following algorithms. Here, the
specify when a particular index constituent should key is employing such algorithms across numerous and

›6 An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019
Figure 3

Source: Lungarella (2002).

Figure 4

Source of graphic: Till (2015).

diverse markets such that the overall portfolio volatility The first mistake is targeting absolute returns rather
is dampened. In addition, investors in such programs than risk. If one does otherwise, the consequences
are seeking pay-off profiles that are long-options- can be disastrous. Figure 5 on the next page illustrates
like. On the other end of the scalability spectrum are how consistent a strategy of trading natural gas using
calendar-spread strategies. These strategies typically bear calendar spreads was between spring 2004 and
have limited scalability but individually can potentially spring 2006.
have quite consistent returns.
By early summer 2006, the profitability of this strategy
had declined by about half of the performance of the
Common Mistakes previous two years. If commodity futures traders had
The second section of this paper covers three responded by doubling up their position size to try to
common mistakes in futures trading, which are maintain an absolute-return target, then in July and
(1) targeting absolute returns rather than risk; (2) August of 2006, they would have sustained losses
establishing inappropriate sizing; and (3) having an about twice the size of the trader’s year-to-date
inadequate appreciation for the need for psychological profits. The significance of such a loss is that when
discipline. a trader’s risk-and-return results differ dramatically
from client and/or prime-broker expectations, this

An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019 ›7
 Figure 5

can set off a critical liquidation cycle (De Souza and a clear signal that a market participant is unwinding
Smirnov, 2004.) In a critical liquidation cycle, client a position in a distressed fashion. For example, on
redemptions and/or additional demands for collateral August 3rd, 2006, the market became aware that
from creditors cause a trader to liquidate positions the hedge fund, MotherRock, was preparing to shut
in a distressed manner, which can then cause further down because of terrible performance, based on a
losses that imperil a fund’s survival, as both the fund’s letter to the fund’s investors from the hedge fund’s
investors and creditors lose faith in the manager. founder.
Unfortunately, once a fund incurs a threshold level of
losses, successive rounds of distressed liquidations will Market participants, though, were already alerted to
quickly cause a step-function decrease in the fund’s a distressed liquidation on August 2nd, 2006, the day
net asset value. before MotherRock’s announcement. A near-month
calendar spread in natural gas experienced a 4.5
Another mistake is inappropriate trade sizing. The size standard-deviation move intraday before the spread
of the trade should be kept within a relatively small market normalized by the close of trading on August
fraction of daily trading volume and open interest. The 2nd, 2006.
commodity markets do not have natural two-sided
flow. For experienced traders in the fixed income, Figure 6 on the next page illustrates the intraday and
equity, and currency markets, this point may not be three-month behavior of the September-vs.-October
obvious. The commodity markets have nodal liquidity. Natural Gas spread on August 2nd. We might assume
If a commercial market participant needs to initiate or that MotherRock had on a position that was correlated
lift hedges, there will be flow, but such transactions to being short this spread. Why make this assumption?
do not occur on demand. Before a trader initiates The brief intense rally in this spread on August 2nd,
a position, particularly one that is large compared 2006 is consistent with the temporary effects of a
to the size of the marketplace, one needs a clear forced liquidation, involving a position related to this
understanding of what flow or catalyst will allow the spread. As it turned out, the scale of MotherRock’s
trader out of a position. A commodity-market observer losses, which may have been up to $300 million, was
can readily identify when a massively-sized distressed small compared to the experience of the hedge fund,
liquidation is occurring, particularly in a spread market. Amaranth, the following month.
If there is no economic or weather news regarding a
market, and a spread relationship changes by many Arguably, a third common mistake is an inadequate
standard deviations relative to recent history, this is appreciation for the need for psychological discipline

›8 An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019
when engaging in futures trading. One financial be potentially exhausting to carry out this superior
author has provided a challenge to other financial- investment strategy.
market writers and presenters. This author of the
book, Quantitative Trading and Money Management,
has said that most financial literature is unrealistic. Famous Debacles
If financial articles were realistic, they would include The following is a review of two well-known famous
both the joys and the tears of trading (Gehm, 2004). debacles, which occurred at the hedge fund, Amaranth,
and at the Futures Commission Merchant, MF Global.
In discussing the crucial elements of an investment The Amaranth case study will cover background on the
process, this article has left out one vital aspect of hedge fund, its trading strategies, the fundamental
trading, and that is a manager’s risk tolerance. Vince rationale for its trading strategies, and also several
(1992) states that monetizing market inefficiencies risk analyses. The paper will also cover the hedge
“requires more than an understanding of money fund’s operational risks, natural counterparties, the
management concepts. It requires discipline to tolerate distressed unwind of its trading positions, and the
and endure emotional pain to a level that 19 out of legal proceedings against the hedge fund and its
20 people cannot bear. … Anyone who claims to be former head energy trader. The MF Global case study
intrigued by the ‘intellectual challenge of the markets’ will provide some background on the lead-up and
is not a trader. The markets are as intellectually aftermath of the firm’s demise, and what the lessons
challenging as a fistfight. … Ultimately, trading is an and reforms are from this debacle.
exercise in self-mastery and endurance.”
Amaranth
Taleb (2001) has explained why it is a challenge for a Amaranth Advisors, LLC was a multi-strategy hedge
manager to follow a disciplined investment process. fund, headquartered in Greenwich, Connecticut,
He provided an example of a return-generating which eventually specialized in natural-gas derivatives
process that has annual returns in excess of T-bills trading. As of August 31st, 2006, the fund had about
of 15% with an annualized volatility of 10%. At first $9.2 billion in assets under management. On Monday,
glance, one would think it would be trivial to carry September 18th, 2006, market participants were
out a trading strategy with such superior risk and made aware of Amaranth’s distress. The founder had
return characteristics. But Taleb also notes that with issued a letter to investors, informing them that the
such a return-generating process, there would only fund had lost an estimated 50% of their assets since
be a 54% chance of making money on any given its end-August value. Additionally, the fund had lost
day. If the investor felt the pain of loss say 2.5 times -$560 million on Thursday, 9/14/06 alone. By the end
more acutely than the joy of a gain, then it could of September 2006, these losses amounted to $6.6
Figure 6

Source: Till (2006).

An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019 ›9
 billion, making Amaranth’s collapse the largest hedge- the-fall in which natural gas is injected and stored in
fund debacle to have thus far occurred. caverns for later use during the long winter season.
Figure 7 shows the futures curve for natural gas as
What trading strategy had Amaranth employed to give of September 26th, 2006.
rise to such massive losses? The fund had employed a
natural gas spread strategy that would have benefited One can note that the yearly futures curves for
under a number of different weather-shock scenarios, natural gas shown here mirror the average inventory
but did so on a scale that still surprises market build-and-draw pattern for natural gas, which was
participants. Amaranth’s core energy trading strategies illustrated in Figure 2.
were constructed through calendar spreads, which were
executed on both the New York Mercantile Exchange Why are natural gas spreads so volatile? It is only
(NYMEX) and on the Intercontinental Exchange (ICE). when a commodity is fully storable, that commodity
Amaranth’s spread trading strategy involved taking spreads can be predictably stable. In that case, the
long positions in winter contract deliveries and short determining factor between the value of one contract
positions in non-winter contract deliveries (Chincarini, versus a later-month contract is the cost of storing
2007). These positions would have benefited from and financing the commodity from one period to the
potential weather events such as hurricanes and next. In 2006, storage capacity for U.S. natural gas had
cold-shocks from 2006 through 2011. actually declined since 1989 and domestic production
had not kept pace with demand. These factors caused
What was the fundamental rationale for Amaranth’s massive volatility in the outright price of natural
positioning in being long winter vs. being short gas and in the price relationships between different
non-winter natural-gas contracts? In order to answer sectors of the natural gas curve. To give one an idea
this question, one needs to provide some background of natural gas’ volatility, on September 26th, 2006,
on the U.S. natural gas market. Natural gas derivatives the implied volatility of one-month, at-the-money
trading has offered hedge funds a potentially alluring natural gas options was 92.5%. This was the case
combination of scalability and volatility, and also at even though there were no hurricanes, heat-waves,
times, pockets of predictability. Traders have been or cold-shocks confronting this market at the time.
able to access these markets through the NYMEX for There are reasonably short-horizon price-pressure
exchange-traded exposure or through the ICE for effects in futures calendar spreads that are due to
over-the-counter exposure. The key economic function the seasonal hedging of inventories, including in
for natural gas is to provide for heating demand natural gas. Amaranth was involved in these sorts of
during the winter in the northern states of the United opportunities on a massive scale.
States. Natural gas is also a key energy source for
air-conditioning demand during the summer. There How could Amaranth’s risk managers have gotten
is a long “injection season” from the spring-through- caught so wrong-footed? One explanation might be
Figure 7

›10 An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019
Figure 8

Figure 9
Scenario Analysis if Winter vs. Non-Winter Spreads Reverted to Past Spread Relationships
Number of Spread Symbol Natural Gas 8/31/06 Level
Contracts NGV-X Spread -2.18
(105 620) NGH-J Oct.-Nov. 2.14
59 543 March-April
Date NGV-X NGH-J Losses due to V-X Losses due to H-J Total Losses Portfolio Loss
31/08/2000 -0.058 0.26 $(2 241 256 400) $(1 119 408 400) $(3 360 664 800) -36.5%
31/08/2001 -0.33 0.09 $(1 953 970 000) $(1 220 631 500) $(3 174 601 500) -34.5%
31/08/2002 -0.33 0.113 $(1 953 970 000) $(1 206 936 610) $(3 160 906 610) -34.4%
31/08/2003 -0.25 0.44 $(2 038 466 000) $(1 012 231 000) $(3 050 697 000) -33.2%
30/08/2004 -0.643 0.57 $(1 623 379 400) $(934 825 100) $(2 558 204 500) -27.8%
31/08/2005 -0.185 2.24 $(2 107 119 000) $59 543 000 $(2 047 576 000) -22.3%

that risk metrics using recent historical data would massively risky the fund’s structural position was in
have vastly underestimated the magnitude of moves its magnitude.
that can occur during an extreme liquidation pressure
event. Figure 8 shows the daily p/l of Amaranth’s As of August 31st, 2006, winter natural gas futures
August 31st, 2006 positions. These positions were prices were trading at an extreme relative to
documented in a 2007 U.S. Senate report. non-winter-month contracts. A simple scenario
analysis of the time would have been to examine
Now, Amaranth’s positions did change over the over say, the previous six years, what the level of the
summer of 2006, so the intention of the graph in fund’s spreads had been. One could have then quickly
Figure 8 is not to show the fund’s actual p/l over evaluated what the potential losses could be if a normal
this period. Instead, the intention of the graph is to state-of-the-world reappeared. In our scenario analysis,
show what the typical volatility that Amaranth’s risk we examine the past spread values for positions that
managers might have expected from the portfolio, were highly correlated to Amaranth’s portfolio in order
going into September 2006. The daily standard to understand the riskiness of Amaranth’s documented
deviation of the August 31st, 2006 positions, based August 31st portfolio. If the two spreads that were
on three months of data, was about $105 million. highly correlated to Amaranth’s portfolio had reverted
But if the fund’s risk managers had employed to levels that had prevailed at the end of August during
scenario analyses that evaluated the range of natural- the previous six years, one could have seen that up to
gas-spread relationships that had occurred in the -36% could have been lost under normal conditions.
not-too-distant past, they would also have seen how This is illustrated in Figure 9.

An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019 ›11
 Now, the best public information we have on the the Amaranth positions by examining the footprints
operational risks associated with an investment in in natural gas spread relationships. It was not until
Amaranth is from an essay by Fauchier Partners the end of October 2006 that the natural gas curve
(Hosking, 2006). According to Fauchier Partners, stabilized, indicating a stop to the liquidation pressure
they had inherited a $30-million position in the by that time as illustrated in Figure 10 on the next page.
fund in 2005 in a portfolio that they had taken on
from a competitor. “Following on-site meetings with In August 2009, Amaranth agreed to pay $7.5 million
… [Amaranth’s] founder and his team, … [Fauchier] to end U.S. cases brought by the Federal Energy
decided to redeem from the fund. Moreover, [they Regulatory Commission and the Commodity Futures
noted that their] … concerns were sufficient to justify Trading Commission over price manipulation (Zajac,
paying a redemption penalty for an early exit,” noted 2013). Five years later on September 15th, 2014, the
Fauchier’s co-founder. Amaranth had just about every former head natural gas trader at Amaranth agreed to
characteristic that Fauchier avoided in a hedge fund. pay $750,000 to settle a Commodity Futures Trading
Commission lawsuit claiming he tried to rig prices of
As summarized in Hosking (2006), these characteristics natural gas contracts (Van Voris and Hurtado, 2014).
included:
• “An apparent absence of sufficient risk controls; MF Global
• High leverage; Futures market participants were caught off-guard
• Poor transparency; when MF Global filed for bankruptcy on October
• Performance heavily dominated by one strategy; 31st, 2011. Essentially, this episode educated industry
• Uncapped expenses in addition to management and participants that customer protections in the U.S.
performance fees; commodity futures markets had been more ambiguous
• Annual re-set of the high water mark on performance than expected. That said, there are a number of
fees; reforms that have been undertaken to help prevent
• Self-administration (i.e., no independent third-party future MF Globals.
verifying returns);
• An in-house broker-dealer (which makes it possible Before its bankruptcy filing, MF Global Holdings Ltd.
to smooth returns); provided execution and clearing services for:
• Individual traders who were not invested in their • exchange-traded and OTC derivatives products,
own books; • non-derivative foreign exchange products, and
• Hubris amongst the management team; and • securities in the cash market.
• Poor liquidity terms.”
The firm had a worldwide client base of 130,000
Fauchier believed that the case of Amaranth was accounts and operated in 12 countries on more than
“anything but unforeseeable.” Rather, it was “a fund 70 exchanges. Although a niche player on Wall Street,
with bad risk management and unattractive terms MF Global was a force on the Chicago Mercantile
for investors.” Exchange. MF Global had 3 million futures and options
positions with a notional value of more than $100
The natural counterparties to Amaranth’s trades billion. Its customers made up 28% of the trading
ultimately would have been the physical-market volume on the CME. Prior to the firm’s spin-out from
participants who had locked in the value of forward its parent company in 2007, MF Global’s business could
production or storage. The physical-market participants be characterized as “dull normal.” During the spin-out
would likely have had physical assets against their of MF Global (MFG), parent company Man Group
derivatives positions so would have had little burdened MF Global with (arguably) an enormous
economic need to unwind these trades at Amaranth’s short-term debt load, relative to the firm’s profitability.
convenience. We can infer how long it took to unwind We can see how large this debt load was from one of

›12 An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019
Figure 10

Source: Till (2007).

Note: “NGH-J Spreads” refer to the March-April Natural Gas calendar spreads.

Figure 11
MF GLOBAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands, except share data)
Short-term borrowings consist of the following: December 31, 2007 March 31, 2007
364-Day Bridge Facility $1 400 000 $-
Other short-term borrowings $400 000
Bank overdrafts 73 672 25 453
Current portion of long-term borrowings 56 552
Total $1 873 672 $82 005
Source: MF Global (2007).

Figure 12: Net Excess Regulatory Capital

MF Global Inc. (Formerly Man Financial Inc.)
A/O Adjusted Net Capital Excess Customers' Required Excess Net Capital /
Date Net Capital Requirement Net Capital Segregated Funds* Customer Funds
05/31/2007 $581 103 464 $402 913 253 $178 190 211 $8 384 461 426 2.1%
06/30/2007 $605 217 511 $364 381 766 $240 835 745 $8 235 595 803 2.9%
10/31/2007 $535 142 778 $427 261 012 $107 881 766 $9 929 407 496 1.1%
11/30/2007 $645 473 966 $414 600 708 $230 873 258 $9 889 773 129 2.3%
02/29/2008 $640 913 963 $509 842 535 $131 071 428 $13 007 347 859 1.0% <-- 6th Lowest Ratio Amongst 151 FCMs
03/31/2008 $771 268 907 $417 502 089 $353 766 818 $9 684 866 771 3.7% <-- 26% Drop in Customer Segregated
Funds
05/31/2008 $782 299 749 $338 459 083 $9 664 731 983 3.5%
$443 840 666
06/30/2008 $608 963 888 $456 329 713 $152 634 175 $10 566 911 049 1.4% <-- On 6/13/08, company announces**
plan to refinance $1.4 billion bridge loan.
This includes using "excess funds."
08/31/2011 $495 665 616 $328 485 943 $167 179 673 $7 270 301 248 2.3%
* These figures only include funds “required” to cover margins. As of February 2012, the CFTC also releases the total assets in customer accounts, according to Prezioso
(2012).
** Source: MF Global (2008).
Data Source: The Commodity Futures Trading Commission (CFTC) monthly reports on “Financial Data for FCMs”

An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019 ›13
 the company’s financial statements that is available As a futures commission merchant, the firm had
on the SEC website, EDGAR. See Figure 11. strongly relied on income from the investment of
customer collateral for its profitability. A FCM is
The spin-out occurred just before the onset of the allowed to credit back to customers only a fraction
global financial crisis, making it uncertain throughout of the income the FCM earns on customer collateral.
2008 how the firm would be able to refinance its short- The firm was profitable in 2007, but then lost money
term debt. That said, MFG was eventually successful in for the following 4 years. We can see also how dire
doing so by the end of 2008. Also because of a rogue the trend was for MF Global’s profitability from the
trader incident, the firm was in a precarious capital June 4th, 2012 MF Global Inc.’s bankruptcy trustee
situation. We can see how weak the firm was relative report. Figure 14 shows how dramatic the drop-off
to other FCM’s from examining data available on the in interest income for MF Global was as short-term
CFTC’s website. As illustrated in Figure 12, MF Global interest rates were set to near zero in the aftermath
was the 6th weakest Futures Commission Merchant of the Global Financial Crisis. This chart covers the
amongst the 151 competing firms of the time. period, September 2007 through June 2011.
 
MF Global’s business model became in jeopardy during In 2010, MF Global hired Jon Corzine as its CEO.
the compression of yields available in fixed-income Corzine’s background included a stint as the Chief
investments. Note the table in Figure 13, which is Executive Office of investment banking and securities
excerpted from an MF Global financial statement that firm Goldman Sachs, and four years as the governor of
is accessible on the SEC website, EDGAR. New Jersey, as well as a partial term as U.S. Senator.
Nonetheless, in Congressional testimony in December

Figure 13
YEAR ENDED MARCH 31,
(Dollars in millions) 2011 2010 2009 2008 2007
Net (loss)/ income attributable to MF Global Holdings Ltd. $(81.20) $(137.00) $(49.10) $(69.50) $188.00
Source: MF Global (2011).

Figure 14

Source: Hughes Hubbard & Reed LLP, Attorneys for James W. Giddens, Trustee for the SIPA Liquidation of MF Global Inc. (2012b), p. 192.

›14 An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019
2011, a few weeks after MF Global went bankrupt, of a challenging environment for its business model.
Corzine admitted that he had little expertise or MF Global’s exposure to the European bond market
experience in the operational aspects of MF Global became larger than that of the exposure of Goldman
(Corzine, 2011). The CEO’s plan was to eventually Sachs and Morgan Stanley combined. This is shown
convert the futures broker into an investment bank, a in Figure 15.
near impossibility, especially given the firm’s precarious  
capital situation and troubled business model. So the The structure of how MF Global was able to enter into
CEO’s task became how to make the firm profitable this leveraged trade with such little capital is illustrated
as soon as possible. Corzine devised a strategy to in Figure 16, which is drawn from MF Global Holdings
enter into a large-scale, leveraged, proprietary Ltd.’s bankruptcy trustee report of April 4th, 2013.
trade on five peripheral European bond markets to
attempt to ensure the firm’s profitability in the face
Figure 15
Company Stated Balance Sheet Exposure as a % Exposure as a % Quarterly VaR Average VaR as a % of
Exposure* of Q End Equity of Q End Assets Q End Equity
MF Global (MF) $6.4 B 460.6% 13.9% $3.0 M 0.2%
Citigroup (C) $13.5 B 7.7% 0.7% $184 M 0.1%
Goldman Sachs (GS) $1.9 B 2.6% 0.2% $101 M 0.1%
Jefferies (JEF) N/A N/A N/A $12.7 M 0.4%
JP Morgan (JPM) $14 B 7.7% 0.6% $94 M 0.1%
Morgan Stanley (MS) $2.0 B 3.4% 0.2% $145 M 0.2%
*as measured under a firm's internal approach
Source: Hughes Hubbard & Reed LLP, Attorney for JAmes W.Giddens, Trustee for the SIPA liquidation of MF Global Inc. (2012b), p89.

Figure 16: End-to-End Structure of MF Global’s Euro RTM Transaction

This figure diagrams how MF Global carried out its leveraged European sovereign-debt trades, focusing on the various financing relationships in doing so.

Source: Morrison & Foerster LLP, Attorneys for the Chapter 11 Trustee (2013), p. 33.
Notes: “MFGI” is an abbreviation for MF Global Inc., “an indirect subsidiary of MF Global Holdings Ltd.”
MFG UK is an abbreviation for MF Global U.K. Limited, which “was the MF Global entity that was a member of the clearinghouses in Europe.”
The “Euro RTMs” were trades in European sovereign debt, which, in turn, were “financed through repurchase to maturity transactions.”
“On the dates MFGI entered into the various Euro RTMs, it recognized a gain in the amount of the difference or spread between (1) the effective interest rate received
by MF Global on the debt securities and (2) the repurchase rate (or the financing rate) paid by MF Global to the counterparty. MFG UK recognized a gain in the
amount of the markup for its role as counterparty to both MFGI and the clearinghouses. The trades were held by MFGI so that it, rather than MFG UK, bore the risk
of default or restructuring of the sovereign debt.
On July 1, 2010, MFGI and MFG UK entered into an investment management agreement related to the Euro RTM trades, which provided that MFG UK would identify
market opportunities related to the sovereign debt of certain European governments. Pursuant to this agreement, MFG UK received 80% of the consolidated net
revenue of such transactions, while MFGI received 20% of the revenue, held the trades, and took the risk that the sovereigns would default or restructure their debt.”

An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019 ›15
 The financing for purchasing the bonds was done bankrupt, so the bank does not have to worry about
through MF Global’s U.K. subsidiary. U.K. law effectively the creditworthiness of the counterparty. Normally
allows more opportunity for leverage by broker- when a firm is going bankrupt, creditors cannot
dealers than U.S. law, which is why the transaction immediately seize assets because the effort is to protect
was executed in London. The bond trade was also the company so that it can reorganize successfully.
documented in MF Global U.K.’s Special Administrator Once banks lose confidence in a weak financial firm
report (KPMG, 2011). The rationale for executing this and quickly terminate repo financing, the weak firm
trade was that the interest rate offered by the short- spirals quickly into bankruptcy.
term European bonds was much higher than their
financing rate; and the bonds seemed to be good A second interesting question from this case is as
risks since they were backstopped by the European follows: why in late October 2011 did the firm have
Financial Stability Facility, which in turn was financed worst-than-expected earnings? Its $186.6 million loss
by members of the Eurozone. The problem was that MF during the 3rd quarter of 2011 was its worst ever.
Global had very little capital to sustain any meaningful The explanation here has to do with an aspect of
mark-to-market fluctuations. U.S. accounting conventions. According to Worstall
(2011) and Weil (2011), most of the loss came from
Before the firm’s downward liquidity spiral, the bond writing down deferred-tax assets. “Basically this item
trade’s mark-to-market materially improved MF represented the money MF [Global] had thought it
Global’s profitability, as shown by the MF Global Inc.’s would save on taxes in the future, assuming it would
trustee report of June 4th, 2012. But astonishingly, be profitable,” wrote Weil (2011). When a company has
the firm did not have a plan for how to exit these losses, one can carry forward those losses, and net
trades if the firm became stressed and wouldn’t be them against future profits, thereby paying less taxes
able to make margin calls. We know this from an in the future. This future ability to pay less taxes is
MF Global Board of Directors’ presentation from the counted as an asset: a deferred-tax asset. By writing
summer of 2011. This report is available on the New off the firm’s deferred-tax assets, that is basically
York Times’ website. admitting that there is no visibility for the firm to
become profitable in the foreseeable future. In the
At the end of October 2011, in rapid succession, the earnings announced on Tuesday, October 25, 2011,
firm experienced a credit downgrade and announced MF Global wrote off its deferred-tax assets, which
worst-than-expected earnings, leading investors, signaled that either the firm or its accountant did
clients, and creditors to doubt the sustainability of the not see profitability on the horizon. The company’s
firm’s business model. At that point, MF Global rapidly credit downgrade and worst-than-expected earnings
liquidated some of its European bond bet; attempted immediately set off a liquidity crisis.
to meet additional margin calls that resulted from its
ratings downgrade; and attempted to meet customer During later hearings before the U.S. Senate Banking,
redemptions as clients left the firm en masse. Housing, and Urban Affairs Committee in April 2012,
Chicago Mercantile Exchange Executive Chairman
One interesting question from this case is as follows: Terrence Duffy pointed out that MF Global’s bankruptcy
how could a seemingly functional firm collapse in a trustee “had said that the company had a liquidity
week? This is the type of question that also comes crisis, and their increases went from $200 million to
up with the Bear Stearns and Lehman bankruptcies $900 million on their margin calls. That money had
of 2008. Roe (2011) has argued that an aspect of to come from somewhere, and if there’s a liquidity
the U.S. Bankruptcy Code provides the explanation. crisis, where was that money coming from?” On June
A bank may choose to provide repo financing for a 4, 2012, the MF Global Inc. bankruptcy trustee showed
weak counterparty since the bank is allowed to seize that MF Global had dealt with its liquidity crisis
collateral quickly if the weak counterparty goes through using funds from futures customer accounts

›16 An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019
(Hughes Hubbard & Reed LLP, 2012b). One week after Trading Commission as a futures commission merchant.
MF Global’s liquidity crisis began, in the morning of According to Collins (2012), the decision to put MF
Monday, October 31, regulators lost confidence in the Global through a bankruptcy process that had been
firm when it was unable to reconcile its books and designed for securities firms “baffled futures industry
satisfactorily explain a significant shortfall that had participants who felt it would delay customers being
been discovered in the firm’s customer segregated made whole.” Added Collins, “futures regulators in the
accounts. This shortfall was without precedent in the past had gone to court to fight for jurisdiction when
history of the futures industry (United States House an asset freeze would be adverse to futures industry
of Representatives, 2012). A potential deal for another customers.”
firm to buy MF Global collapsed, given the shortfall
in customer segregated accounts. Starting on October 31st , 2011, MF Global customers’
funds and futures positions were frozen on and off
On October 31st, MF Global’s holding company declared for days. Astonishingly, when the MFG bankruptcy
bankruptcy under Chapter 11 of the Bankruptcy was filed, nobody appeared in court to represent
Code; and the Broker-Dealer/Futures Commission the interests of customers, or to oppose the claims
Merchant subsidiary was put into liquidation in a of creditors whose interests were directly adverse to
Securities Investors Protection Act proceeding. The customers. Within days of the bankruptcy, the trustee
legal procedures, though, which cover the liquidation did work with the CME and the CFTC to move customer
of securities firms, can potentially be interpreted positions and some of the margin associated with
such that they conflict with the legal procedures these accounts to other FCMs (Collins, 2012).
that were designed for the bankruptcy of futures
firms. Normally, a futures firm is put through another The trustee responsible for liquidating MF Global Inc.
type of bankruptcy process where there are explicit had to go through “a steep learning curve regarding
procedures that are customized for futures firms. futures operations,” reported Collins (2012). It turns
This was not done for MF Global. Again, the firm was out that protections under the Commodity Exchange
put through a process designed for securities firms. Act conflict with the U.S. Bankruptcy Code, so in the
That said, there is a credible body of law that futures past regulators had moved customer positions and
customers should have priority over all other claimants. margins from weak Futures Commissions Merchants
But it did take 5 weeks for the MF Global Inc. trustee to healthy FCMs before the weak FCM declared
to publicly verify this. bankruptcy. This action did not happen in the case
of the MF Global bankruptcy, which is a key reason
An inspector general report on the CFTC’s actions for the chaos surrounding its bankruptcy.
was released on May 20th of 2013. One gets a sense
of the shock that there was actually a shortfall in In summary, the firm did not have enough capital for
customer segregated accounts. Accordingly, it was its various lines of business. As cited in Stewart (2012)
only at about 5am on Monday, October 31st that a during the summer of 2011, the Assistant Treasurer of
decision was made to put the company in bankruptcy MF Global Inc. in Chicago “became worried about the
and have a trustee become responsible for the firm’s growing liquidity needs and where the cash would
company. Also, given that MF Global was regulated by come from.” She wrote in an email in August 2011:
so many different regulators, there was an enormous “Why is it I need to spend hours every day shuffling
coordination problem amongst regulators during the cash and loans from entity to entity?”, describing the
firm’s final weekend. process as a “shell game,” reported Stewart (2012).
Figure 17 on the next page illustrates how money
Within the United States, MF Global was regulated was continuously loaned from entity-to-entity during
by the Securities and Exchange Commission as a the firm’s final month, frequently to ensure that each
broker-dealer and also by the Commodity Futures entity’s capital requirements were met on a daily basis.

An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019 ›17
 On June 27th, 2013, the CFTC charged that: • There should be a rigorous re-examination of the
“MF Global [had] unlawfully used nearly one billion protections provided to futures customers, including
dollars of customer segregated funds to support its improving and clarifying bankruptcy code priorities,
own proprietary operations and the operations of its and determining whether futures customers should
affiliates …. [Former MF Global CEO Jon] Corzine bears be covered by insurance as in Canada.
responsibility for MF Global’s unlawful acts. He held
and exercised direct or indirect control over MF Global Regarding reforms, the CFTC “approved new NFA
and Holdings and either did not act in good faith or rules that cover foreign accounts; controls on the
knowingly induced these violations” (CFTC, 2013). use of excess segregated funds; and reporting and
recordkeeping requirements,” according to CFTC
On January 4th, 2017, Corzine settled with the CFTC (2012). In addition, the NFA approved a requirement
and paid $5 million to settle claims from the case. for “each futures commission merchant … to provide
The regulator also set a lifetime ban on him personally its Designated Self-Regulatory Organization …
trading other people’s money in the futures industry. with view-only access via the Internet to account
information for each of the FCM's customer segregated
The lessons from the MF Global collapse are as follows: funds account(s) maintained and held at a bank or
• Futures customers can lose some or all of their trust company,” announced NFA (2012).
collateral during the collapse of an FCM. All futures
customers should do their own due diligence on the
credit worthiness of their FCM; one can do so with the
help of reports from the National Futures Association. Conclusion
• A governmental or self-regulatory body should Gaining expertise in the commodity markets usually
receive direct reports from custodian banks that occurs through trial-and-error experiences. The main
hold futures customer margin, as is done in China. goal of this paper is to provide enough cautionary
(The CME and NFA followed up with implementing a notes and lessons to help others in making wise choices
comparable system.) in futures trading.

Figure 17

Source: Hughes Hubbard & Reed LLP, Attorneys for James W. Giddens, Trustee for the SIPA Liquidation of MF Global Inc. (2012a), p. 10.

›18 An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019
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›20 An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019
 ————————
About EDHEC-Risk Institute
————————
 About EDHEC-Risk Institute
————————

Founded in 1906, EDHEC is one of the foremost international business schools. Operating from campuses in
Lille, Nice, Paris, London and Singapore, EDHEC is one of the top 15 European business schools. Accredited
by the three main international academic organisations, EQUIS, AACSB, and Association of MBAs, EDHEC has
for a number of years been pursuing a strategy of international excellence that led it to set up EDHEC-Risk
Institute in 2001. This Institute boasts a team of permanent professors, engineers and support staff, and
counts a large number of affiliate professors and research associates from the financial industry among its
ranks.

The Need for Investment Solutions and Risk Management

Investment management is justified as an industry only to the extent that it can demonstrate a capacity to
add value through the design of dedicated and meaningful investor-centric investment solutions, as opposed
to one-size-fits-all manager-centric investment products. After several decades of relative inertia, the much
needed move towards investment solutions has been greatly facilitated by a true industrial revolution triggered
by profound paradigm changes in terms of (1) mass production of cost- and risk-efficient smart factor indices;
(2) mass customisation of liability-driven investing and goal-based investing strategies; and (3) mass distribution,
with robo-advisor technologies. In parallel, the investment industry is strongly impacted by two other major
external revolutions, namely the digital revolution and the environmental revolution.

In this fast-moving environment, EDHEC-Risk Institute positions itself as the leading academic think-tank in the
area of investment solutions, which gives true significance to the investment management practice. Through our
multi-faceted programme of research, outreach, education and industry partnership initiatives, our ambition is
to support industry players, both asset owners and asset managers, in their efforts to transition towards a novel,
welfare-improving, investment management paradigm.

EDHEC-Risk New Initiatives

In addition to the EDHEC Alternative Indexes, which are used as performance benchmarks for risk analysis by
investors in hedge funds, and the EDHEC-IEIF Monthly Commercial Property index, which tracks the performance
of the French commercial property market through SCPIs, EDHEC-Risk has recently launched a series of new
initiatives.

• The EDHEC-Princeton Retirement Goal-Based Investing Index Series, launched in May 2018, which represent
asset allocation benchmarks for innovative mass-customised target-date solutions for individuals preparing for
retirement;

• The EDHEC Bond Risk Premium Monitor, the purpose of which is to offer to investment and academic
communities a tool to quantify and analyse the risk premium associated with Government bonds;

• The EDHEC-Risk Investment Solutions (Serious) Game, which is meant to facilitate engagement with graduate
students or investment professionals enrolled on one of EDHEC-Risk’s various campus-based, blended or fully-
digital educational programmes.

›22 An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019
 About EDHEC-Risk Institute
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Academic Excellence and Industry Relevance

In an attempt to ensure that the research it carries out is truly applicable, EDHEC has implemented a dual
validation system for the work of EDHEC-Risk. All research work must be part of a research programme, the
relevance and goals of which have been validated from both an academic and a business viewpoint by the
Institute's advisory board. This board is made up of internationally recognised researchers, the Institute's
business partners, and representatives of major international institutional investors. Management of the
research programmes respects a rigorous validation process, which guarantees the scientific quality and the
operational usefulness of the programmes.

Seven research programmes have been conducted by the centre to date:

• Investment Solutions in Institutional and Individual Money Management;
• Equity Risk Premia in Investment Solutions;
• Fixed-Income Risk Premia in Investment Solutions;
• Alternative Risk Premia in Investment Solutions;
• Multi-Asset Multi-Factor Investment Solutions;
• Reporting and Regulation for Investment Solutions;
• Technology, Big Data and Artificial Intelligence for Investment Solutions.

EDHEC-Risk Institute’s seven research programmes explore interrelated aspects of investment solutions to
advance the frontiers of knowledge and foster industry innovation. They receive the support of a large
number of financial companies. The results of the research programmes are disseminated through the
EDHEC-Risk locations in the City of London (United Kingdom) and Nice, (France).

EDHEC-Risk has developed a close partnership with a small number of sponsors within the framework of
research chairs or major research projects:
• Financial Risk Management as a Source of Performance,
in partnership with the French Asset Management Association (Association Française de la Gestion
financière – AFG);
• ETF, Indexing and Smart Beta Investment Strategies,
in partnership with Amundi;
• Regulation and Institutional Investment,
in partnership with AXA Investment Managers;
• Optimising Bond Portfolios,
in partnership with BDF Gestion;
• Asset-Liability Management and Institutional Investment Management,
in partnership with BNP Paribas Investment Partners;
• New Frontiers in Risk Assessment and Performance Reporting,
in partnership with CACEIS;
• Exploring the Commodity Futures Risk Premium: Implications for Asset Allocation and Regulation,
in partnership with CME Group;
• Asset-Liability Management Techniques for Sovereign Wealth Fund Management,
in partnership with Deutsche Bank;

An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019 ›23
 About EDHEC-Risk Institute
————————

• The Benefits of Volatility Derivatives in Equity Portfolio Management,

in partnership with Eurex;
• Innovations and Regulations in Investment Banking,
in partnership with the French Banking Federation (FBF);
• Dynamic Allocation Models and New Forms of Target-Date Funds for Private and Institutional
Clients,
in partnership with La Française AM;
• Risk Allocation Solutions,
in partnership with Lyxor Asset Management;
• Infrastructure Equity Investment Management and Benchmarking,
in partnership with Meridiam and Campbell Lutyens;
• Risk Allocation Framework for Goal-Driven Investing Strategies,
in partnership with Merrill Lynch Wealth Management;
• Financial Engineering and Global Alternative Portfolios for Institutional Investors,
in partnership with Morgan Stanley Investment Management;
• Investment and Governance Characteristics of Infrastructure Debt Investments,
in partnership with Natixis;
• Advanced Investment Solutions for Liability Hedging for Inflation Risk,
in partnership with Ontario Teachers’ Pension Plan;
• Cross-Sectional and Time-Series Estimates of Risk Premia in Bond Markets,
in partnership with PIMCO;
• Active Allocation to Smart Factor Indices,
in partnership with Rothschild & Cie;
• Solvency II,
in partnership with Russell Investments;
• Advanced Modelling for Alternative Investments,
in partnership with Société Générale Prime Services (Newedge);
• Structured Equity Investment Strategies for Long-Term Asian Investors,
in partnership with Société Générale Corporate & Investment Banking.

The philosophy of the Institute is to validate its work by publication in international academic journals,
as well as to make it available to the sector through its position papers, published studies and global
conferences.

To ensure the distribution of its research to the industry, EDHEC-Risk also provides professionals with access
to its website, https://risk.edhec.edu, which is devoted to international risk and investment management
research for the industry. The website is aimed at professionals who wish to benefit from EDHEC-Risk’s
analysis and expertise in the area of investment solutions. Its quarterly newsletter is distributed to more
than 150,000 readers.

›24 An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019
 About EDHEC-Risk Institute
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Research for Business

EDHEC-Risk Institute also has highly significant executive education activities for professionals, in partnership
with prestigious academic partners. EDHEC-Risk's executive education programmes help investment
professionals upgrade their skills with advanced asset allocation and risk management training across traditional
and alternative classes.

In 2012, EDHEC-Risk Institute signed two strategic partnership agreements. The first was with the Operations
Research and Financial Engineering department of Princeton University to set up a joint research programme
in the area of investment solutions for institutions and individuals. The second was with Yale School of
Management to set up joint certified executive training courses in North America and Europe in the area of risk
and investment management.

As part of its policy of transferring know-how to the industry, in 2013 EDHEC-Risk Institute also set up ERI
Scientific Beta, which is an original initiative that aims to favour the adoption of the latest advances in smart
beta design and implementation by the whole investment industry. Its academic origin provides the foundation
for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven
scientifically with full transparency in both the methods and the associated risks.

EDHEC-Risk Institute also contributed to the 2016 launch of EDHEC Infrastructure Institute (EDHECinfra), a
spin-off dedicated to benchmarking private infrastructure investments. EDHECinfra was created to address the
profound knowledge gap faced by infrastructure investors by collecting and standardising private investment
and cash flow data and running state-of-the-art asset pricing and risk models to create the performance
benchmarks that are needed for asset allocation, prudential regulation and the design of infrastructure
investment solutions.

An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019 ›25
 ————————
EDHEC-Risk Institute
Publications and Position
Papers (2016-2019)
————————
 EDHEC-Risk Institute
Publications and Position Papers (2016-2019)
————————
2019
• Le Sourd, V. and L. Martellini. The EDHEC European ETF and Smart Beta and Factor Investing Survey 2019
(August).
• Maeso, J.M., Martellini, L. and R. Rebonato. Cross-Sectional and Time-Series Momentum in US Sovereign
Bond Market (May).
• Maeso, J.M., Martellini, L. and R. Rebonato. Defining and Expoiting Value in Bonds (May).
• Maeso, J.M., Martellini, L. and R. Rebonato. Factor Investing in Sovereign Bond Markets - Time-Series
Perspective (May).

2018
• Goltz, F. and V. Le Sourd. The EDHEC European ETF and Smart Beta and Factor Investing Survey 2018 (August).
• Mantilla-Garcia, D. Maximising the Volatility Return: A Risk-Based Strategy for Homogeneous Groups of
Assets (June).
• Giron, K., L. Martellini, V. Milhau, J. Mulvey and A. Suri. Applying Goal-Based Investing Principles to the
Retirement Problem (May).
• Martellini, L. and V. Milhau. Smart Beta and Beyond: Maximising the Benefits of Factor Investing (February).

2017
• Amenc, N., F. Goltz, V. Le Sourd. EDHEC Survey on Equity Factor Investing (November).
• Amenc, N., F. Goltz, V. Le Sourd. The EDHEC European ETF and Smart Beta Survey 2016 (May).
• Maeso, J.M., Martellini, L. Maximising an Equity Portfolio Excess Growth Rate: A New Form of Smart Beta
Strategy? (November).
• Martellini, L. and V. Milhau. Mass Customisation versus Mass Production in Retirement Investment Management.
Addressing a “Tough Engineering Problem“ (May).
• Esakia, M., F. Goltz, S. Sivasubramanian and J. Ulahel. Smart Beta Replication Costs (February).
• Maeso, J.M., Martellini, L. Measuring Volatility Pumping Benefits in Equity Markets (February).

2016
• Amenc, N., F. Goltz, V. Le Sourd. Investor Perceptions about Smart Beta ETFs (August).
• Giron, K., L. Martellini and V. Milhau Multi-Dimensional Risk and Performance Analysis for Equity Portfolios
(July).
• Maeso, J.M., L. Martellini. Factor Investing and Risk Allocation. From Traditional to Alternative Risk Premia
Harvesting (June).
• Amenc, N., F. Goltz, V. Le Sourd, A. Lodh and S. Sivasubramanian. The EDHEC European ETF Survey 2015
(February).
• Martellini, L. Mass Customisation versus Mass Production in Investment Management (January).

›27 An EDHEC-Risk Working Paper — Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles — December 2019
 For more information, please contact:
Maud Gauchon on +33 (0)4 93 18 78 87
or by e-mail to: maud.gauchon@edhec-risk.com

EDHEC-Risk Institute
393 promenade des Anglais
BP 3116 - 06202 Nice Cedex 3
France
Tel. +33 (0)4 93 18 78 87

EDHEC Risk Institute—Europe

10 Fleet Place, Ludgate
London EC4M 7RB
United Kingdom
Tel: + 44 207 332 5600

risk.edhec.edu