The fund invests in a portfolio of commodity futures contracts. The fund’s strategy is based on balancing risks across commodity sectors, managing risk over time through volatility targeting and drawdown control, and active management based on commodity fundamentals and trends. The fund can go long or short individual commodity contracts, but will always be net long commodities as a whole.
Risk Balancing Across Sectors: In a risk-balanced portfolio, every sector contributes roughly equally to the volatility of the total portfolio and no one commodity dominates near-term returns. To achieve this, less volatile sectors are given larger notional allocations, while volatile sectors get a smaller notional allocation.
Risk Balancing Through Time: Over time, the volatility of a commodities portfolio can vary significantly. During stress periods when the volatility across commodities increases sharply, such as 2008, the riskiness of a commodities portfolio may become higher than desirable. By monitoring volatilities and correlations of each commodity, it is possible to increase or decrease portfolio-wide exposures in order to target a pre-specified risk level for the fund and keep returns smoother over time.
Drawdown Control: We believe volatility targeting should be supplemented by a systematic, pre-set drawdown control policy, dictating how portfolio risk will be reduced during a prolonged crisis to help control the size of absolute drawdowns. As soon as markets stabilize, the drawdown policy ensures that the fund returns to being fully invested. We believe that this improves investors’ odds of sticking with a long-term allocation.
Active Management: The fund is actively managed, and the fund managers will vary the fund’s positions in individual commodities and commodity sectors (even going short in some commodities at time) based on an evaluation of the attractiveness of the positions. These shifts in allocations will be determined using AQR’s proprietary models. Information that is evaluated includes the roll yield, inventory, and supply and demand relationships of each commodity, as well as the macroeconomic environment and other factors.