Does sophistication of the weighting scheme enhance the performance of long-short commodity portfolios?

Abstract

The commodity pricing literature advocates the design of long-short portfolios based on equal weights. Relaxing the assumption of naive diversification, this article studies the benefits of applying sophisticated weighting schemes to the construction of long-short momentum and term structure portfolios. Weighting schemes based on risk minimization and risk timing are found to dominate the naive allocation and the weighting schemes based on utility maximization. This conclusion is not challenged by concerns pertaining to transaction costs, illiquidity, data mining, sub-periods, and model parameters and robustly persists when we consider as sorting signals hedging pressure, speculative pressure and, to a lower extent, basis-momentum.