Investable commodity premia in China

Commodity premia and risk management

“…Stop loss is only effective in a factor context if it can effectively reduce drawdowns on the factor level. While Bianchi et al (2021) find that stop-loss does not lead to improved factor performance, we stress the importance of managing risks on an individual asset level for factor strategies. The rationale is straightforward.…”

“…The rationale is straightforward. As opposed to stopping out of the entire factor portfolio when a loss threshold is triggered (see Bianchi et al, 2021), stopping out of individual commodities while keeping the other positions intact allows the nonstopped positions to continue generating potential returns for the factor strategy. 3 Intuitively, it is logical to assume that on average comovements among factor portfolio constituents are less than one.…”