Portfolio Hedging Strategy - Metals and Commodities

Abstract

From the perspective of portfolio management, hedging is a proactive risk management measure that aims to protect the portfolio from unwanted drawdown risk and avoid loss on investment by incorporating assets into a portfolio which moves in the opposite direction as the market. However, trying to limit the risk could result in limiting potential profits. Commodities are one of the best hedges against inflation as their price typically accelerates during such times providing benefit to the investor. We use the innovative approach of hedging commodities using a combination of CAPM and RSI Strategy to identify which of 9 observed hard commodities (Aluminium, Zinc, Nickel, Lead, Tin, Copper, Gold, Brent Oil and Natural Gas) should have been incorporated into investment portfolio during the period 2008-2023. The SML strategy is reviewed in the empirical analysis for its suitability as a hedging instrument compared to the RSI, which is regularly used to hedge metals and commodities. Our MS Excel and IBM SPSS software analysis showed that RSI was a better hedging strategy than SML in 21 out of 36 cases but without statistical significance.