Does Sophistication of the Weighting Scheme Enhance the Performance of Long-Short Commodity Portfolios?

This paper develops a long-short portfolio construction technique that captures the fundamentals of backwardation and contango and simultaneously deviates from the equal-weighting scheme traditionally employed in the commodity literature. We find that the sophisticated weighting schemes based on risk minimization and risk timing dominate the traditional naive equal-weight allocation and the schemes based on utility maximization. Our findings apply to the consideration of long-short portfolios based on momentum, term structure, hedging pressure, and speculative pressure. The conclusions robustly persist after accounting for transaction costs, illiquidity, data mining, various model specifications, and different sub-periods