Commodity Futures Carry: Ranking Contracts to Build Long–Short Portfolios

Summary

This document summarizes a commodity futures strategy based on carry and the futures term structure. It describes a directional rule in which the nearby, or main, contract is bought when its price is below the next contract and sold when it is above it. The rationale is linked to carry decomposition, cost of carry, and a hedging-pressure hypothesis, though the source summary does not provide the underlying derivations.

The reported test sorts contracts into five groups by carry. It finds a monotonic negative relationship between carry and strategy Sharpe ratio, then forms a basic long–short portfolio by buying the lowest-carry group and shorting the highest-carry group. The summary reports an annualized return of 11.2% and a Sharpe ratio of 1.15. These figures are reported without details on the sample period, markets, transaction costs, or implementation, so they do not establish how the result would generalize.

Key ideas

• The strategy uses nearby versus next-contract prices to guide directional futures positions.
• The document links its carry rationale to cost of carry and hedging pressure.
• Contracts are sorted into five carry groups, with reported Sharpe ratios declining as carry rises.
• The basic portfolio buys the lowest-carry group and shorts the highest-carry group.
• The summary reports an annualized return of 11.2% and a Sharpe ratio of 1.15, with limited testing details.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.