New York, 9 December 2011

Commodity Research


Important disclosures are found in the Disclosure appendix
Investing in commodity futures indices is one of the easiest
and most popular ways to gain exposure to the broad com-
modity universe. However, the growing number of commodity
indices makes it complicated to choose the right one. The
individual commodity indices not only differ in their composition
and weighting of the commodities included, but also in the way
they allocate investments across commodity futures curves.
Consequently, investors must have a good understanding of
the special features of commodity indices in order to make an
investment decision.
The purpose of this publication is to explain how commod-
ity indices work and how they generate returns. We also give
an overview of the most common or benchmark commodity
indices, as well as more complex investment strategies.

How commodity futures indices generate returns
Commodity indices usually invest in commodity futures. A
commodity futures contract is a legally binding agreement
between two parties to buy or sell a commodity at a specific
time in the future for a price agreed upon today. Futures con-
tracts are standardized regarding the quality, quantity, delivery
time and location for the respective commodity in order to
make them tradable on an exchange. In contrast to an invest-
ment in stocks or bonds, investments in commodity futures
contracts do not represent a claim on future payments. Com-
modities do not pay interest or dividends. The sources of re-
turns are thus completely different for commodities than for
traditional investments such as stocks or bonds. This is one of
the reasons why commodity investments deliver returns that
are largely uncorrelated to these asset classes. The total re-
turn of commodity futures indices is driven by three different
factors:

1. Spot price changes: Changes in spot prices account
for the bulk of the total returns. Commodity spot prices can
move quickly and the price trends can be fairly disparate
across the individual commodity categories in the index.
2. Roll yield: Similar to bonds, futures also have a maturity
date. Shortly before maturity, the expiring futures need to
be rolled over into subsequent contracts in order to main-
tain exposure to the sector. Depending on the shape of
the term structure in the individual market, roll yield or roll
costs arise. In backwardated markets, the subsequent

Research Flash US
A primer on commodity indices
Update December 2011
Private Banking

Highlights
Investing in commodity futures indices is
an easy and efficient way to gain exposure
to commodities as an asset class.
Each commodity index represents an
individual investment strategy. Hence, the
individual indices differ quite significantly
with regard to their risk-return profiles and
react differently to specific market condi-
tions.
When market conditions change, it can
be attractive to switch indices in order to
be better positioned.

Figure 1
The development of different classic benchmark commodity
indices over the past five years
40
60
80
100
120
140
160
180
200
Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11
Dow Jones UBS Commodity Index Credit Suisse Commodity Benchmark
S&P GSCI Commodity Index CRB Commodity Index
Index, January 2006 = 100
Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

New York, 9 December 2011

Research Flash US 2
contracts are cheaper than the expiring ones and roll yield
is positive. In contangoed markets, the opposite is the
case (see Appendix for a more detailed description of
backwardation and contango).
3. Yield on collateral: Commodities futures are traded via
margin accounts, which means that in order to gain expo-
sure to a certain dollar amount of commodities, an investor
only has to invest a fraction of this dollar amount in com-
modity futures. In a fully collateralized investment strategy,
as is the case with commodity indices, the capital not in-
vested in futures is typically invested in fixed income secu-
rities. These securities also generate a certain amount of
returns.

As outlined above, spot price changes generally account
for the bulk of total returns. However, roll yields can have a
major impact on total returns, with 2009 being a prime exam-
ple. Figure 2 shows the contributions of various factors to total
returns. As commodity indices are all composed differ-
ently, spot returns can vary greatly. For example, while the
DJ UBS Index increased by 18.9% in 2009, the S&P GSCI
underperformed with a gain of only 13.5% since the index did
not benefit as much as the DJ UBS Index from the sharp
gains in the base metals sector. Moreover, the S&P GSCI
suffered additionally from its heavy weighting in the energy
sector as the unfavorable term structure of energy commodi-
ties also worked against the index. In 2009, the term struc-
tures of crude oil and US natural gas were in deep contango
and thus the cost of carry for crude oil and US natural gas
reached double-digit levels. Although spot prices of the S&P
GSCI energy sub-index advanced by 62.4% in 2009, the total
return on the S&P GSCI energy index was only about 11.2%
during the same period. The yield on collateral has been quite
negligible over the past few years, but it can also be an impor-
tant source of returns, particularly when interest rates are high.
Historically, there have been long periods when the collateral
yield accounted for a large part of total returns. For example,
between 1975 and 1985, the collateral yield was often an
important and at times the only source of positive total
returns.

Since commodity indices generate their total returns from
the above-described three sources, altering the investment
strategy can change the risk-return profile of an index quite
significantly. An investment strategy for a commodity fu-
tures index thus has to define the following aspects: 1)
Which commodities to include and how much weight the re-
spective commodities should be given. 2) What time to matur-
ity the futures contracts should have. 3) Where the capital that
is not invested in futures should be allocated.

1) Generating spot returns Weighting mechanism
The realized spot returns of an index are dependent on the
range of commodities included and on the weightings each
commodity is given in the index. Consequently, the weighting
scheme is the first important step when analyzing a
commodity index.
While commodities in general have some common drivers,
each commodity sector as well as each single commodity has
its own drivers and thus reacts differently to different develop-
ments. As a result, correlations between various commodity
categories are generally low (for instance, agricultural com-
modities are only weakly correlated with base metals). Accord-
ing to portfolio theory, combining different assets with low
return correlations can enhance the expected returns of a
portfolio for a given risk level by reducing volatility for a given
expected return. Thus, diversification properties are gen-
erally an attractive feature of commodity futures indices.
To achieve a meaningful diversification, we not only need
an appropriate number of commodity futures, but also an ap-
propriate weighting scheme. Due to the diversification as-
pect, we generally prefer indices where there is no
heavy overweight in one particular commodity or com-
modity sector. While this would speak in favor of an equal
weighting scheme, it is also desirable that the weights to some
extent reflect the significance of each commodity. To do so,
different approaches have been developed. Some commodity
indices are weighted according to global production values or
consumption for each commodity, and others according to
market liquidity. In some cases, there are also limits placed on
Figure 2

Figure 3
Breakdown of S&P GSCI Commodity Index annual returns

Target sector weightings of different commodity indices

-60
-40
-20
0
20
40
60
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Spot return Roll yield Yield on the collateral S&P GSCI Commodity Index Total Return
YoY changes in %

0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
S&P
GSCI
DJUBS R/J
CRB
RICI UBS
CMCI
DBLCI MLCX CSCB
Energy Base metals Precious metals Agriculture Livestock
Sector weights in %
Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Source: Various index providers, Credit Suisse

New York, 9 December 2011

Research Flash US 3
the maximum weight a commodity or commodity category can
have.
Here, the re-weighting schedule is also an important
factor. Because of the different returns on the individual
commodities, the index weights can change significantly over
time. If, for example, the price of crude oil rises more sharply
than the price of gold, the weighting of crude oil in the index
portfolio will increase over time in comparison with gold. As a
result, when re-weighting is only performed once a year, the
actual allocation of a commodity in an index can differ quite
substantially from the target allocation (see Figure 3) and thus
can lower the diversification of the index.

2) Commodity term structures the effect of roll yields
The shape of a commoditys term structure is connected to
the economics of storage. Since the seller must store the
commodity until delivery, so-called carry costs apply.
These costs include, for example, warehousing fees and inter-
est foregone on money tied up, minus the convenience yield.
The convenience yield is defined as the utility a commodity
consumer has from physically holding the commodity. Inves-
tors who buy futures contracts have to compensate the com-
modity holder for these costs.
The longer the time window until the day of delivery, the
higher storage and financing costs will be and, consequently,
the higher the futures price. In this case, the term structure is
in a contango. However, if a commodity is currently very
scarce, market participants are willing to pay an additional
premium for immediate delivery, which can exceed the storage
and finance costs. Consequently, prices at the front end of the
term structure are higher than at the long end, and the term
structure is said to be in backwardation. A backwardated
term structure thus indicates a tight market situation.
To illustrate, Figure 4 shows the WTI crude oil term struc-
ture in mid-March 2008 and mid-January 2009. In March
2008, the term structure was in backwardation due to the very
tight market conditions. However, this situation changed quite
rapidly during summer 2008, as demand started to fall due to
high prices. In Q4 2008, demand continued to decline be-
cause of the weakening economic situation and US crude oil
inventories started to climb sharply higher. Thus the WTI term
structure fell into a steep contango at the beginning of 2009.
When the underlying futures market is in backwarda-
tion, a buy and hold strategy yields positive returns if
other factors remain constant. When a futures contract
reaches expiry, its price converges to the spot price of the
commodity. An investor accrues a roll yield when shifting the
exposure from the expiring contract to the subsequent, less
expensive contract in order to stay invested. The opposite is
true when the market is in contango. When the expiring con-
tract is rolled over, the roll yield will be negative (i.e. roll cost)
as the subsequent contract trades at a premium over the ex-
piring contract. In this case, the total return of a "buy and hold"
strategy will be negatively impacted. Since commodity indices
typically invest in futures markets, positions need to be rolled
over. Thus, investors in commodity indices need to be aware
of the current term structure. If a commoditys term struc-
ture is in contango, there may be significant negative
roll returns that can potentially exceed the positive returns in
the spot market.
Traditionally, commodity indices tend to roll over futures to
the next nearby futures contract, or from the first-month
contract to the second-month contract (see Figure 4). But the
impact of this rolling exercise can be mitigated by choosing
contracts with a longer time to maturity or by changing
the rolling schedule. For example, an index sponsor could
choose to roll over each month from the third- to the fourth-
month contract instead of rolling from the first- to the second-
month contract, or to roll over positions only every other
month. It is also possible that the tenor is not specified in ad-
vance but is flexible and dependent on market conditions.
Generally, this is an important aspect of any commodity in-
vestment strategy.
When speaking about rolling over futures contracts, it is
also important to define the rolling window during which com-
modity futures contracts are rolled forward. Most commodity
indices roll over their contracts during a visible window of
around five days. However, larger rolling windows can prevent
contracts from being rolled over under disadvantageous trading
conditions.

3) Collateral yield
The third component of index returns is the collateral yield. In
fully collateralized indices, the dollar amount not invested di-
rectly in the futures contracts is allocated to US T-bills, which
pay a certain yield. Theoretically, other collateral generating
different returns could be chosen, for example corporate
bonds or equities. However, including such assets would add
another source of uncertainty, and the strategy would not nec-
essarily reflect the developments in the commodity segment
anymore, but could be considered a hybrid commodity strategy
instead. It is important to note, however, that some commodity
indices aim to enhance returns with such a strategy.




Figure 4
Term structures of WTI crude oil and rolling scheme of a
passive buy and hold investment strategy.
30
40
50
60
70
80
90
100
110
120
1 2 3 4 5 6 7 8 9 10 11 12
15.01.2009 15.03.2008
WTI crude oil prices in USD / barrel
buy 2M cont ract sell 1M contract
Backwardation
Contango
Tenor in months
Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

New York, 9 December 2011

Research Flash US 4
Traditional passive commodity indices: The benchmarks
The commodity index universe has grown significantly in recent
years. Historically, commodity indices were developed for in-
formative purposes to track the overall price activity in com-
modity markets. The Economists commodity price index is
one of the oldest indices, published for the first time in 1864.
Investable commodity indices have only appeared in recent
decades and since then have become an increasingly popular
choice to gain exposure to the asset class.

Reuters/Jefferies CRB Index (R/J CRB Index)

The CRB Index was launched in 1957. A fundamental revision
of the index was adopted in May 2005, when it was renamed
Reuters/Jefferies CRB Index. Before the revision, the CRB
Index included 17 commodity futures, which all had an equal
weighting in the index. Consequently, the index was largely
geared to agricultural commodities. Since the agricultural sec-
tor has seen extended periods of relative underperformance
within commodities in recent years, the CRB Indexs return
has lagged behind that of the other commodity indices. After
the revision in mid-2005, the R/J CRB Index now contains 19
commodities and no longer assigns each different commodity
an equal weighting. In order to account for the increased im-
portance of the energy markets and the different levels of li-
quidity across commodity markets, the commodities have been
divided into four groups. The first group includes only energy
resources. At 23% of the overall index, the greatest weighting
is assigned to WTI crude oil. The second group contains
commodities that are highly marketable. Every commodity in
this group is assigned a weighting of 6%. The third group cov-
ers the less liquid commodities, with each commodity receiving
a weighting of 5%. The fourth group includes commodities
with a low liquidity. The commodities in this group enter the
overall index with a weighting of 1%.
The new R/J CRB Index reflects the economic signifi-
cance of the individual commodities better than before the
revision. The prices for the index are based on the most cur-
rent futures contract for each commodity. The R/J CRB Index
sets the weightings of the individual commodities back to their
original values each month. The R/J CRB Index rolls its in-
cluded contracts from the nearby contract to the next nearby
contract using a four-day rolling window between the first and
the fourth business day of the month.

S&P Goldman Sachs Commodity Index (S&P GSCI)

The S&P Goldman Sachs Commodity Index was introduced in
1991 and is the most widely followed commodity index. His-
torical values have been calculated (or back-tested) until 1970
and normalized to a value of 100 on 2 January 1970. The
index currently comprises 24 commodities. Individual commod-
ity weightings are set annually (in November), based primarily
on the USD value of each commoditys respective global pro-
duction. The index is comprised of the principal physical com-
modities that are the subject of active, liquid futures markets.
More specifically, the weightings are based on the value of the
five-year average global production of the respective com-
modities. There are also minimum liquidity requirements for a
market to be included in the index. Relating the index weights
in the S&P GSCI to production volumes results in a large
overweight of energy commodities (see Figure 3). Altogether,
energy sources account for about 68% of the total index
(January 2012). Consequently, the major influence of oil
prices on the index reduces the diversification effect of the
other components and thus can increase the volatility of the
overall index.
The index is rebalanced once a year during its January roll
period. Futures contracts in the S&P GSCI are mainly rolled
from the first to the second nearby contract. The rolling win-
dow lasts from the fifth to the ninth business day of each
month. On each of these days, 20% of all contracts are rolled
over until, after the ninth business day, 100% of the portfolio
is invested in the second-month contract. Futures on the S&P
GSCI index are available and traded on the Chicago Mercantile
Exchange.

Dow Jones UBS Commodity Index (DJ UBS)
(formerly DJ AIG)

The DJ UBS Index, launched in 1998, is a broadly diversified
index designed to represent the performance of fully collateral-
ized long positions in the front-month futures contracts of a
total of 20 different commodities. The weightings of the indi-
vidual commodities are set annually (in October), based on a
combination of the value of global production and the liquidity
of the respective futures markets. Five-year averages are used
to determine both the production and liquidity components.
There are also weighting restrictions to prevent an excessive
weighting of any individual commodity. No commodity can
have a weighting less than 2% or more than 15% of the over-
all index. Moreover, no group of related commodities (e.g.
energy, precious metals, livestock, etc.) may make up for
more than 33% of the overall index. Figure 3 illustrates the
weightings of the different commodity categories in the DJ
UBS Index.
The index is rebalanced once a year during its January roll
period. The DJ UBS rolls over most of its contracts approxi-
mately every other month to the contract that expires in two
months. The rolling window lasts from the fifth to the ninth
business day of each month. On each of those days, 20% of
all contracts are rolled over until, after the ninth business day,
100% of the portfolio is invested in the second-month con-
tract. Separately, the index committee decided to include
Brent in the index by swapping some of its WTI exposure dur-
ing the upcoming 2012 rebalancing exercise.

Rogers International Commodity Index (RICI)

The RICI has existed since 1998 and, with 38 commodities, is
the most widely diversified index. The weighting of this index is
set annually in December for the next year based on global
consumption and the liquidity of the respective commodities.
However, the actual weights are finally assigned directly by the
RICI Committee. In order to keep the index transparent, con-
sistent and stable, the composition is changed rarely and gen-
erally only after significant shifts in the world economy or mar-

New York, 9 December 2011

Research Flash US 5
kets. Since adjustments are performed at the discretion of the
RICI Committee, the index does not represent a purely passive
commodity portfolio. On the other hand, since the weightings
are not changed for performance reasons, the RICI is also not
really considered to be an actively managed index. There are
no weighting restrictions on the RICI, which makes it quite
flexible. Since the index contains by far the most commodities,
it reflects the global commodity market most completely.
However, the RICI is less transparent than the other commod-
ity indices due to the way it is re-weighted.
The RICIs index weightings are rebalanced at the begin-
ning of each month in order to maintain the fixed initial weight-
ings. The reference prices for the rebalancing are the closing
prices of the last business day of the previous month. The
index rolls into the contracts that are expected to be the most
active during the next month from the day prior to the last
business day of the month to the first business day of the fol-
lowing month by 33.33% per day. These contracts are defined
in a so-called roll matrix at the beginning of each year. The
fact that the contracts in the roll matrix are fixed at the discre-
tion of the RICI Committee also reduces the transparency of
the index to some extent. Nevertheless, the average maturity
of the contracts is significantly higher, which improves the
performance of the index when most markets are in contango.

Enhanced benchmark indices challenging the
traditional benchmarks
Credit Suisse Commodities Benchmark (CSCB)

The CSCB is a diversified, long-only commodity futures index
that was built on an established index originally formulated in
1975 by Robert J. Greer. This index was first traded in 1993
(the Bob Greer Commodity Index or BGCI). The index cur-
rently comprises 34 different commodity contracts from all five
commodity categories. The CSCB weighting methodology is
based on world production and global exchange market liquid-
ity. Consequently, the index also has an overweight in the en-
ergy sector, but is somewhat less exposed to this sector than
the S&P GSCI. There are also sub-indices for the five com-
modity sectors (energy, base metals, precious metals, agricul-
ture and livestock) available.
The index is rebalanced monthly, which helps to maintain
index diversification over time. Moreover, the frequent rebal-
ancing has been designed to reduce volatility by avoiding con-
centration in individual commodities. In order to mitigate con-
centration risk to a single nearby contract the CSCB invests in
contracts that fall within the first three months, thus spreading
exposure across multiple delivery periods. Another distinguish-
ing feature of the CSCB is that it has an extended rolling pe-
riod that begins five business days prior to the last day of the
previous month and lasts until the ninth day of the current
month. This mechanism helps to diversify exposure to calendar
roll spreads across multiple weeks.

Deutsche Bank Liquid Commodity Index (DBLCI)

The DBLCI was launched in February 2003 and has historical
data from 1988 onwards. The DBLCI tracks the performance
of only six commodities from the energy, precious metals,
industrial metals and grains sectors. These are WTI crude oil
(35%), heating oil (20%), aluminum (12.5%), gold (10%),
corn (11.25%) and wheat (11.25%), which are the most liquid
contracts in their respective sectors. The various weightings
are chosen to reflect world production and inventories in these
sectors. According to Deutsche Bank, a low number of com-
modities in an index has the advantage of reducing liquidity
risks and transaction costs, while the lower diversification is
less important since the correlation of commodities that belong
to the same commodity sectors tends to be very high.
The DBLCI has fixed weightings, and the index is rebal-
anced annually in the first week of November. As a result,
similar to the S&P GSCI, the allocation of the index can differ
from its target allocation during the year, according to price
movements of the underlying commodity futures. The most
distinguishing factor is the unusual rolling schedule of the
DBLCI. The energy contracts are rolled over monthly, while all
other commodity futures are rolled over annually, at the same
time as the rebalancing. Deutsche Bank adopts this procedure
due to the historical tendency for energy curves to be in back-
wardation and metal and agricultural forward curves to be in
contango. The annual rebalancing occurs between the second
and sixth business day of November, and futures contracts are
selected with an expiry in December of the following year. The
futures contracts for WTI crude oil and heating oil, which are
rolled over monthly between the second and the sixth business
day, are selected with an expiry month two months following
the rebalancing months.

Merrill Lynch Commodity Index (MLCX)

The MLCX Index was introduced in June 2006 and was back-
tested until mid-1990. The MLCX is a diversified and passive
long-only commodity futures index and currently comprises 19
different commodities from all five commodity sub-categories.
Commodity contracts are selected based on liquidity and then
weighted based on the importance of each commodity in the
global economy with an emphasis on downstream commodi-
ties, such as gasoline. The index caps the weight of any sub-
index to 60% of the overall index and sets a minimum weight
of 3% per sub-index in order to ensure diversification and to
prevent excessive weighting in one particular commodity cate-
gory. However, as the index can allocate up to 60% to one
sector at the beginning of each year, the weighting in energy
is still relatively high compared to other indices (see Figure 3).
The MLCX is rebalanced annually. In our view, the main
advantage of this index lies in the rolling mechanism. In order
to mitigate the negative effect of rolling yields, the index rolls
over every month from the second month contract to the third
month contract. Thus the index has a longer average maturity
than, say, the S&P GSCI or the DJ UBS. Moreover, the index
rolls its contracts over an extended rolling period from the first
to the fifteenth business day. This makes the MLCX less vul-
nerable to unfavorable time spreads that occur during the roll-
ing window of the more well-known commodity indices such
as the S&P GSCI and DJ UBS.

New York, 9 December 2011

Research Flash US 6
Rule-based commodity indices implementing different
investment strategies
Given the volatile and cyclical nature of commodity price dy-
namics, traditional benchmarks, such as the S&P GSCI or the
DJ UBS, may not always be the right metric for a given market
environment or strategy. To fill this gap, a wide range of rule-
based indices has been developed to outperform passive
benchmarks by applying strict and transparent rules that define
the allocation process. Below we provide an overview of some
rule-based commodity indices that seek exposure to commodi-
ties via four different investment strategies value, momen-
tum, duration and carry.

Value

Value investing refers to strategies that actively overweight
most attractively valued assets and underweight least attrac-
tively valued assets. As commodities are non-yielding assets,
traditional valuation methods cannot be applied to identify
most-or-least attractively valued markets. Thus, alternative
approaches are needed. For instance, the DBLCI-MR uses a
valuation strategy that is based on the assumption of mean
reverting markets. Accordingly, an overweight is allocated to
underperforming markets, which are trading cheaply in a
historical comparison, while expensive markets that outper-
form will receive an underweight allocation. The Barclays
Backwardation Index applies a different approach that uses
backwardation to identify best values in commodity markets.

Deutsche Bank Liquid Commodity Index Mean
Reversion (DBLCI-MR)
The DBLCI-MR is a long-only index and was launched at the
same time as the DBLCI in February 2003. It has the same
underlying commodities. However, in contrast to the DBLCI,
the DBLCI-MR does not rebalance its weightings annually, but
resets them if a pre-defined trigger event occurs. This is the
case when the 1-year moving average of a commodity futures
contract is more than 5% away from its 5-year moving aver-
age. If such an event occurs, all commodity weights are rebal-
anced such that the weights of the cheap commodities are
increased and the weights of the expensive commodities are
reduced, according to a pre-defined formula. When all the
commodities are within 5% of their 5-year average, the
weights will automatically revert to the weights of the DBLCI.
Due to this weighting mechanism, the DBLCI-MR tends to
reduce position gradually from those markets that have rallied
the most and reinvest into cheaper-valued commodities.
The rolling mechanism is similar to that of the DBLCI, En-
ergy contracts are rolled over every month, while other con-
tracts are only rolled over annually (see above). The rolling
window is between the second and sixth business day of the
month.

Barclays Capital Backwardation Index

The Barclays Capital Backwardation Index tries to identify
commodities with best value by screening for backwardated
futures curves. A backwardation situation usually occurs when
a market is perceived to be tightly supplied. Tights supplies are
taken as a signal that prices are likely to appreciate. The index
then uses a rule-based model that monitors the level of back-
wardation of 23 different commodities. For each commodity,
the model measures the difference between the first and the
twelfth month deferred futures contracts. The allocation proc-
ess will then select an equally weighted basket of ten com-
modities with the highest backwardation signals. When no
backwardation is detected, the model will select the least con-
tangoed markets. In order to maintain a high level of diversifi-
cation, net exposure is constrained to a maximum of 40% of
agriculture markets. The allocation of the index to the different
commodity markets is achieved by investing in 3-month de-
ferred futures contracts, agriculture being the exception,
where a custom rolling scheme is used to account for season-
ality and liquidity. The overall investment process is repeated
on a monthly basis.

Figure 5
The development of different advanced benchmark indices
over the last five years compared to the DJ UBS

60
80
100
120
140
160
180
200
220
240
Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11
DJUBS CSCB DBLCI MLCX
Index, January 2006 = 100
Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse
Figure 6
Performance of selected rule-based indices over the last five
years.
50
100
150
200
250
300
350
Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11
DBLCI Mean Reversion TR DBLCI Optimum Yield TR CS Movers Index TR UBS CMCI TR
Index, January 2006 = 100
Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

New York, 9 December 2011

Research Flash US 7
By targeting backwardated commodity markets, the index
has the advantage of optimizing the effect of roll yields and
can therefore be also seen as following a carry investing strat-
egy.

Momentum

In contrast to value strategies, momentum strategies take po-
sitions in those markets with the strongest technical momen-
tum (i.e. relative outperformance) while exiting markets that
show weaker momentum (i.e. underperforming markets). For
instance, the allocation process of the CS Movers and the
Barclays Capital Momentum Alpha indices follows such a strat-
egy.

Credit Suisse Momentum and Volatility Enhanced
Returns Strategy Index (CS MOVERS)
The CS MOVERS Index has a tactical investment strategy
and, unlike traditional commodity indices, it aims to take ad-
vantage of different market cycles through long or short posi-
tions. Index weightings are defined according to a systematic
allocation model. The strategy is based on S&P GSCI sub-
indices and incorporates 24 components from the five main
commodity sectors. The underlying commodities have been
selected in order to reflect liquidity, relevance and diversifica-
tion. The index is unleveraged and has no constraints on over-
all net exposure.
The index is re-weighted every month according to the fol-
lowing methodology. First, long/short signals for each of the
24 S&P GSCI sub-indices are derived, based on historical
performance and realized market volatility. In more volatile
market conditions (on a relative basis for each commodity), the
strategy focuses on shorter-term horizons, and, in less volatile
conditions, it focuses on longer time horizons to judge per-
formance (1-month for high volatility, 3-month for average
volatility, 6-month for low volatility). The absolute perform-
ances of the 24 sub-indices over the respective time horizons
are then compared. Only the ten S&P GSCI sub-indices with
the strongest signals are selected. However, in order to keep
diversification on a high level, each commodity sector has a
maximum weight (energy 30%, precious metals 20%, base
metals 50%, agriculture 30% and livestock 10%). If this
maximum weight for a sector is reached, the commodity with
the next best signal from another commodity sector is chosen.
If the performance was positive (negative) then the index goes
long (short). Each of the ten positions is equally weighted by
10%, irrespective of whether the position is long or short.
As the S&P GSCI sub-indices already capture roll returns,
the signals also take the shape of the futures curve into ac-
count. Consequently, if a commodity suffers from high roll
costs, it will have a weaker performance and is likely not to be
selected or to enter the index as a short position.

Barclays Capital Momentum Alpha Index

The Barclays Capital Momentum Alpha index was introduced
in April 2008 and aims to outperform traditional benchmarks.
The strategy can be applied to any existing benchmark index.
Customized long or long-short index baskets are also available.
Momentum Alpha is identifying the curve segment (up to five
months deferred from the nearby contract) across individual
commodity futures with the highest historical outperformance
(alpha) over the past 12 months. In a second step, the respec-
tive contracts with the highest alpha are selected and the ex-
posure is allocated accordingly. In order to capture changing
market conditions, the index strategy is re-run on a monthly
basis. Moreover, the weights of the individual commodities are
rebalanced monthly to reflect the target weights of the under-
lying benchmark index. The rolling of contracts takes place
between the fifth and ninth business day of the month.

Duration

As previously explained, traditional commodity benchmarks
usually invest, hold and roll over in nearby future contracts.
Indices, which implement duration strategies such as the UBS
CMCI and the CSCB Curve index family, offer the possibility to
select exposure to different segments of the futures curve. In
doing so, duration strategies aim to mitigate negative roll re-
turns and reduce volatility.

UBS the BLOOMBERG PROFESSIONAL service Con-
stant Maturity Commodity Index (UBS CMCI)
The UBS CMCI was introduced in January 2007 and is made
up of 27 components representing 25 commodities from the
energy, industrial metals, precious metals, agricultural and
livestock sectors. The index is backtested from 1997. There
are sub-indices for each commodity sector and for each indi-
vidual commodity available. Weightings are derived from liquid-
ity, primary economic indicators (such as CPI, PPI and GDP)
as well as consumption values and are limited to between a
minimum of 0.6% and a maximum of 20% per commodity.
Weightings are revisited twice a year in May and November,
while the index is rebalanced monthly.
A special feature of the UBS CMCI is that it also diversifies
across different tenors by investing in five constant maturities:
3 months, 6 months, 1 year, 2 years and 3 years. Futures
contracts are rolled over continuously and not only on given
business days in order to maintain a constant maturity. In
terms of the actual implementation, the index holds the two
contracts closest to the chosen time of delivery in changing
proportions such that, on average, the desired constant matur-
ity is met. As time passes, the weights for the nearby con-
tracts are shifted in order to keep the average time constant.

Credit Suisse Commodity Benchmark Curve Segment
Indices

CSCB curve segment indices are built upon the same index
methodology as the CSCB index (highlighted above). How-
ever, while the CSCB takes positions over short-dated futures
contracts (first three contracts or 1x3), curve segment indices
capture the performance of commodities across the term
structure of the futures curve. These indices invest in four
predefined segments of the curve: from the fourth to the sixth
physical delivery period included (4x6) from the seventh to the

New York, 9 December 2011

Research Flash US 8
twelfth (7x12), from the thirteenth to the twenty-fourth
(13x24) and from the twenty-fifth to the thirty-sixth (25x36).
The weighting methodology for CSCB curve segment indices
is also based on world production and global exchange market
liquidity. However as fewer commodities remain liquid further
out along the curve, weights and components in each curve
segment index are different,
Similar to the CSCB, all four indices are rebalanced
monthly, while the rolling mechanism begins five business days
prior to the last day of the previous month and lasts until the
ninth day of the current month.

Carry

Carry strategies aim to optimize roll yields when investing in
commodity futures. Roll yields arise when the term structure of
a commodity market is in backwardation. The DBLCI-OY is an
example of an index implementing such a strategy.

Deutsche Bank Liquid Commodities Indices Optimum
Yield (DBLCI-OY)
The DBLCI-OY aims to optimize roll returns by applying a rule-
based approach when it rolls over futures contracts for each
commodity component in the index. The index does not select
the new futures contract based on a predefined schedule (e.g.
monthly), but rolls over to the future that generates the maxi-
mum implied roll yield. In doing so, the DBLCI-OY tries to
optimize roll yields and minimize roll losses. The active com-
modity futures contract is rolled over to a new contract when it
is close to expiry. On the first business day of each month
(called verification date by Deutsche Bank), each commodity
futures contract currently in the index is tested for continued
inclusion. If the delivery month of the contract is the next
month, a new contract is selected. The new futures contract
included in the index is the contract with the maximum implied
roll yield, based on the closing price for each qualified con-
tract. Qualified contracts are those with a delivery month no
sooner than two months and no later than 13 months after the
verification date. If two contracts have the same roll yield, the
contract with the closer expiry month is selected. The rolling
window for the contracts that are no longer to be included in
the index is between the second and sixth business day of the
month.
The DBLCI-OY indices are available for twenty-four com-
modities drawn from the energy, precious metal, industrial
metals, agriculture and livestock sectors. Moreover, the
DBLCI-OY indices are also available based on the DBLCI
benchmark weights.

Actively managed commodity indices incorporating
the experts view
In order to enhance spot returns, new indices were created
where the index managers re-weight the index according to
their outlook on the commodities included. This is an approach
generally followed by funds and there are not many indices
that pursue such a strategy yet. While such indices intend to
outperform passively managed indices by applying market
knowledge, the weights are set at the discretion of the man-
agers, making them less transparent. The actual returns are
dependent on the managers abilities, in which an investor has
to trust.

Credit Suisse Glencore Active Index Strategy
(CS GAINS) (S&P GSCI-weighted)

The CS GAINS is an actively managed long-only commodity
futures index that seeks to outperform a benchmark commod-
ity index by actively changing the weights of the various under-
lying commodities dynamically every month based upon the
view of Glencore International AG, one of the worlds largest
physical traders of commodities.
The index weights are determined according to votes
from the individual commodity trading units at Glencore. Ex-
perts from the individual commodity trading units at Glencore
vote independently each month on the commodities they trade.
The traders can choose among five different views, which are
then used to scale (S) the base weights for each underlying
(1. bearish: S=0.0; 2. mildly bearish: S=0.5; 3. neutral:
S=1.0; 4. mildly bullish: S=1.5; 5. bullish: S=2.0). The base
weights are determined monthly as the effective weights of
each commodity in the benchmark (here, for example, the
S&P GSCI) at the time the new weights are calculated. A cash
position is held for each commodity that Glencore has rated
bearish. The size of this cash position is equal to the sum of
the base weights of those commodities times the investable
capital. The remaining investable capital is allocated to all the
other commodities that are not voted bearish. The base
weights of these commodities are scaled according to the
given rating. For example, if a commodity has a bullish (neu-
tral) rating, its base weight is multiplied with 2.0 (1.0). If the
total of the resulting new weights is greater (smaller) than
100%, then all weights are reduced (increased) by a factor of
1/(total new weights), so that the total of the final weights
including the cash component is exactly 100%.

Hybrid and dynamic commodity indices
The latest developments in the commodity index universe are
hybrid commodity indices, where the underlying investment
space is extended to the equity markets. Such indices aim to
outperform pure commodity indices through a dynamic shift of
investments between commodities and commodity equities.
Other innovative approaches seek to invest in the commodity
asset class by following thematic strategies.

Credit Suisse Commodity and Resource Equity Switch
Index (CS CARES)

The CS CARES is a long only, hybrid index with allocations to
commodities and to related resource equities. The allocation
between these two asset classes is switched dynamically ac-
cording to a switching methodology. The index consists of 21
underlying indices that are represented through 21 different
commodities from the S&P GSCI. These underlying indices
are grouped into five commodity groups; namely petroleum,
natural gas, industrial metals, precious metals and agriculture.

New York, 9 December 2011

Research Flash US 9
The systematic and fixed switch mechanism uses three factors
to determine if the index should be invested in commodities or
in the related resource equities for each commodity group. For
that period, the CS CARES is 100% invested in either the
S&P GSCI commodity index or in the equity components of
each commodity group.
The first factor that the index takes into account is the
commodity ratio, which is the equity-implied commodity price
divided by the spot commodity price. The equity-implied com-
modity price is based on a regression model of historical spot
commodity prices versus historical and projected cash flow
return on investment (CFROI; Value Cost Ratio is used for
precious metals) of the related equities. The second factor is
the roll yield of the relevant commodity minus the dividend
yield of the relevant equities. The last factor is the economic
price/earnings (P/E) ratio, which is calculated as enterprise
value over net assets, divided by CFROI. The lower the multi-
ple, the more attractively valued the equity is. Whether an indi-
cator gives a signal depends on the 2-year rolling average of
the indicator +/ 20%. If the indicator is outside this range, it
will give a signal. If the three signals combined show a prefer-
ence toward an asset class, the allocation will be made ac-
cordingly. However, if three indicators combined show no
preference, the allocation will be to commodities.

Credit Suisse Commodity Benchmark China Index

The concept behind the CSCB China Index is to create a bas-
ket of commodities that are most geared to Chinas commod-
ity-consumption profile. In contrast to traditional benchmarks
that use weighting approaches based on global production or
consumption, the CSCB China index assigns weights based
on the degree of importance of a commodity in regard to Chi-
nese net imports. The indexs weighting methodology run
annually is performed by computing a ratio measuring the
significance of Chinese net imports relative to global supply
ex-China for each commodity. This ratio is averaged using a 3-
year running average and then combined with a liquidity weight
based on daily trading volumes and open interest. A final test
on investability is performed. Both rebalancing and rolling
mechanisms are similar to the CSCB methodology.
The result of this unique weighting process is an index
presenting an unusual commodity exposure compared to other
traditional benchmarks. For instance, the energy sub-
component of the CSCB China is fully invested in Brent crude
oil futures contracts. The index also offers exposure to non-
typical commodity markets such as palladium or coal. Overall,
the CSCB China commodity allocation is also more equally
balanced across the different commodity categories and
shows strong cyclical characteristics. While investing in less
single commodities compared to the CSCB Index, the CSCB
China index still provides sufficient diversification.

How to choose a commodity index?
Indices can differ from one another, in some cases considera-
bly, not only in terms of the selection and weighting of individ-
ual commodities, but also in their rolling schemes and re-
weighting processes. In this regard, each commodity index
represents a different investment strategy. Hence, risk-
return profiles across commodity indices can vary significantly
and the indices themselves react differently to specific market
conditions. It is therefore important for investors to know the
specific features of an index and how changing market condi-
tions can affect a commodity investment (see Tables 1, 2 and
3 on pages 1011).
If the purpose of an investor is to gain exposure to the
overall commodity asset class, benchmark indices are an easy
and efficient way to invest. But, while all these indices try to
reflect the commodity space in a holistic way, the respective
approaches can be different. As a result, the various com-
modity indices have different exposures to the sub-
commodity categories and spot returns can be quite
diverse. Some of the indices might also include rather small
markets in order to reflect the commodity space in its most
complete way, as for example the RICI. Others, such as the
DBLCI, only include the most liquid contracts. The former ap-
proach has the advantage for the investor of being well diversi-
fied, while the latter has the advantage of reducing liquidity
risks. Here, investors have to decide what feature is more
important for their investment purposes.
Most commodity benchmark indices have compara-
ble rolling mechanisms. They all have a pre-defined rolling
schedule and, in most cases, roll over every month from one
of the nearby contracts to the subsequent futures contract. As
a result, the average maturities of the benchmark indices are
nearly the same. The advantage of rolling from the nearby to
the next nearby contract is that these contracts are normally
the most liquid ones. Nonetheless, an index with such a rolling
schedule can suffer roll costs when the underlying markets are
in contango. On the other hand, these indices perform better
when backwardation prevails, which is, however, less often the
case. In this regard, the CSCB and the DBLCI can offer an
alternative. The CSCB index invests in the contracts that fall
into the first three months and thus has a longer average ma-
turity, which improves returns when most of the markets are in
contango. The DBLCI has also a longer average maturity as
the monthly index roll only occurs for energy contracts - which
are rolled over the contracts that expire in every two months -
while all other contracts are rolled over annually - and over the
contracts that expire in the December of the following year.
The DBLCI tends to perform particularly well when energy
markets are in backwardation, while, at the same time, other
markets are in contango.
Investors who seek more sophisticated commodity trading
strategies should consider rule-based commodity indices as a
suitable alternative to benchmark indices. However, under-
standing which strategy the index aims to implement and in
which market environment this strategy performs best is cru-
cial (see Table 4). Rule-based indices that invest in com-
modity markets following value or momentum strate-
gies seek to enhance spot returns by taking advantage of
diverging fundamental and/or price dynamics across the dif-
ferent commodity sectors. The CS MOVERS Index, for exam-
ple, invests in those commodities that have the strongest per-
formance and is thus a momentum-driven index. Given its
allocation process, the index tends to perform best in volatile
environments with sharp price swings, while a consolidation

New York, 9 December 2011

Research Flash US 10
environment with low volatility is less desirable. The CS Movers
Index can also go short and therefore, in most cases, will out-
perform passive long-only indices when the commodity sector
is in a downtrend. The DBLCI-MR, on the other hand, follows
a value strategy and increases exposure to markets that are
trading cheaply relative to their past performance. The DBLCI-
MR is thus best suited when the commodity space is in an
uptrend as the index tends to reduce position gradually from
those markets that have rallied the most and reinvest into
commodities that have lagged.
Rule-based indices that invest in commodity markets
following carry or duration strategies seek to enhance
roll yields by taking advantage of the term structure of the
commodity futures curve. In the case of indices following dura-
tion strategies, such as the UBS CMCI, the objective of the
index is to select exposure to specific segments of the futures
curve to reduce the effect of negative rolling returns and re-
duce volatility. Owing to their longer average maturity com-
pared to other traditional benchmarks, such strategies tend to
outperform in contangoed markets. Carry strategies, on the
other hand, optimize the roll yield by either choosing to invest
in commodity markets that are most backwardated or by rolling
over futures contracts that maximize the optimal roll yield
such as the DBLCI-OY. The allocation process of carry indices
also suggests an outperformance of such strategy in contan-
goed markets.
Last but not least, investors who want to delegate the
management of their commodity portfolios can invest in ac-
tively managed indices. In this case, the investor has to trust in
the managers ability to outperform in any market conditions.

Table 1: Traditional and enhanced benchmark indices key characteristics
R/J CRB CI S&P GSCI DJ-UBS CI RICI DBLCI MLCX CSCB
Inception 1957 1991 1998 1998 2003 2006 2009
Historic data since 1957 1970 1991 1998 1988 1990 1998
No. of components 19 24 20 38 6 19 34
Weighting Four-tier approach
based on liquidity.
Production and
liquidity.
Production and
liquidity.
Global consumption
and liquidity/ de-
termined annually
by index committee.
Liquidity/ deter-
mined by index
committee.
Global production
value and liquidity.
Production and
liquidity.
Maximum weight None None 33% per sector,
15% per commod-
ity.
None None 60% per sector None
Minimum weight 1% per commodity 1% per commodity
(only for Group IV)
2% per commodity None None 3% per sector None
Rebalancing Monthly Annual Annual Monthly Annual Annual Monthly
Roll schedule Every month from
the nearby to the
next nearby con-
tract.
Every month from
the nearby to the
next nearby con-
tract.
For energy & met-
als: Every other
month into the
contract with expiry
in 2 months. All
others: from the
nearby to the next
nearby contract.
Every month into
the contract that is
expected to be the
most active during
the next month.
Energy contracts
are rolled over each
month. All other
contracts are rolled
over once a year
between 2 and 6
November.
Every month from
the second to the
third nearby con-
tract.
The index invests in
contracts that fall
within the first 3
months in equal
units.
Rolling window 1st4th business
day of the month.
5th9th business
day of the month.
6th10th business
day of the month.
2nd last business
day of a month to
the 1st of the next
month.
2nd6th business
day.
1st15th business
day.
5th last business
day of a month to
the 9th of the next
month.
Average maturity
(indicative)
Almost the same as
the S&P GSCI ~1.6
months.
The lowest of all
benchmark indices
with ~1.5 months.
Somewhat longer
than the S&P GSCI
since energy and
metals contracts are
held 2 months ~1.7
months.
Longer than DJ
UBS and S&P
GSCI at ~2.6
months.
The longest of the
benchmark indices,
but varies consid-
erably during the
year.
Longer than DJ
UBS and S&P
GSCI at ~2.5
months.
Estimated at more
than 2.5 months,
as it is invested in
contracts with
expiry in 13
months.
Advantages Liquid and transpar-
ent; good diversifi-
cation.
Liquid and
transparent.
Liquid and transpar-
ent; good diversifi-
cation.
Reflects the global
commodity market
in the most com-
plete way.
Transparent and
only invested in
highly liquid com-
modities; suffers
least from contango
due to longest
average maturity.
Liquid and transpar-
ent; focus on down-
stream commodi-
ties; extended
rolling period; suf-
fers less from
contango.
Liquid and trans-
parent. Extended
rolling period;
diversification over
next 3 nearby
contracts reduces
concentration risk;
suffers less from
contango.
Disadvantages Due to its roll
mechanism, the
index suffers quite
strongly if markets
are in contango.
Very high exposure
to energy sector
leads to low diversi-
fication and higher
volatility. The index
suffers quite
strongly if energy
markets are in
contango.
Due to its roll
mechanism, the
index suffers quite
strongly if markets
are in contango
Less transparent
than other indices;
some future con-
tracts in the index
are quite illiquid with
very low open
interests.
Low diversification.
If the 6 components
included do not
perform as well as
the rest of the
commodity space,
the index underper-
forms.
High exposure to
energy sector leads
to lower diversifica-
tion and higher
volatility.
Benefits less from
backwardation due
to its roll mecha-
nism.
Source: Various index providers, Credit Suisse

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Table 2: Traditional and enhanced benchmark indices 2012 target weights
R/J CRB CI S&P GSCI DJ-UBS CI RICI* DBLCI MLCX CSCB
Energy 39.00% 67.52% 32.64% 44.00% 55.00% 60.00% 56.43%
NYM/ICE WTI Crude Oil 23.00% 30.25% 9.69% 21.00% 35.00% 32.63% 19.35%
ICE Brent Crude Oil - 17.35% 5.31% 14.00% - - 19.35%
NYM Heating Oil 5.00% 4.75% 3.46% 1.80% 20.00% - 2.87%
ICE Gasoil - 7.49% - 1.20% - 12.61% 4.03%
NYM RBOB Gasoline 5.00% 4.74% 3.41% 3.00% - 12.19% 5.87%
NYM Natural Gas 6.00% 2.94% 10.77% 3.00% - 2.58% 4.95%
Industrial Metals 13.00% 8.14% 18.64% 14.00% 12.50% 10.33% 13.74%
CMX Copper high grade 6.00% - 7.06% - - - 0.96%
LME Copper grade A. - 3.74% - 4.00% - 5.28% 3.56%
LME Zinc high grade - 0.61% 3.12% 2.00% - 0.87% 1.99%
LME Aluminum primary 6.00% 2.53% 5.88% 4.00% 12.50% 3.05% 3.43%
LME Nickel primary 1.00% 0.79% 2.58% 1.00% - 1.13% 2.27%
LME Tin - - - 1.00% - - -
LME Lead standard - 0.47% - 2.00% - - 1.54%
Precious Metals 7.00% 3.22% 12.56% 7.10% 10.00% 4.16% 7.13%
CMX Gold 6.00% 2.68% 9.79% 3.00% 10.00% 3.50% 2.53%
CMX Silver 1.00% 0.54% 2.77% 2.00% - 0.66% 1.58%
CMX Platinum - - - 1.80% - - 1.58%
CMX Palladium - - - 0.30% - - 1.45%
Agriculture 34.00% 16.80% 30.42% 31.90% 22.50% 22.52% 18.67%
CBOT SRW Wheat 1.00% 3.22% 4.96% 4.75% 11.25% 5.86% 2.60%
KCBOT HRW Wheat - 0.99% - 1.00% - - 1.17%
CBOT Corn 6.00% 4.64% 6.67% 4.75% 11.25% 5.57% 3.76%
CBOT Soybeans 6.00% 2.55% 7.08% 3.35% - 2.99% 2.15%
CBOT Soybean Meal - - - 0.75% - - 0.35%
CBOT Soybean Oil - - 3.37% 2.00% - 1.42% 0.50%
ICE/EN Sugar 5.00% 2.28% 3.76% 2.00% - 2.95% 2.14%
ICE/EN Coffee 5.00% 1.02% 2.57% 2.00% - 1.28% 1.85%
ICE/EN Cocoa 5.00% 0.30% - 1.00% - - 1.57%
ICE Cotton #2 5.00% 1.79% 2.00% 4.20% - 2.45% 2.10%
Others 1.00% - - 6.10% - - 0.48%
Livestock 7.00% 4.32% 5.74% 3.00% 0.00% 3.00% 4.03%
CME Live Cattle 6.00% 2.42% 3.63% 2.00% - 1.96% 1.97%
CME Feeder Cattle - 0.41% - - - - 0.31%
CME Lean Hogs 1.00% 1.49% 2.11% 1.00% - 1.04% 1.76%
Source: Various index providers, Credit Suisse
*2012 weights not available at the time of publishing
Table 3: Traditional and enhanced benchmark indices performance characteristics
R/J CRB CI S&P GSCI DJ-UBS CI RICI DBLCI MLCX CSCB
Outperformance The index has the
highest exposure to
the agricultural
sector and thus
performs well when
this sector outper-
forms energy or
metals. Benefits
from backwardation.
Due to the high
exposure to en-
ergy, the index
performs well
when energy
prices are rising.
Benefits when
commodity mar-
kets are in back-
wardation.
It is the most
balanced index and
tends to outper-
form other indices
when energy
underperforms.
Benefits when
commodity markets
are in backwarda-
tion.
The index mainly
outperforms when
the less liquid
components are
rising more than
the other compo-
nents, which are
not included in the
other indices.
Outperforms other
indices when the 6
components per-
form better than all
other commodities.
Moreover, outper-
forms when con-
tango prevails in
most markets.
Due to the high
exposure to en-
ergy, the index
performs well when
energy prices are
rising. Moreover, it
outperforms when
contango prevails in
most markets.
Outperforms other
indices when
contango is high
due to the roll
mechanism.
Average yearly return
(since inception) 9.2% (since 1994) 9.6% 5.7% 10.4% 10.2% 11.2% 9.9%
Volatility
(since inception) 16.6% (since 1994) 20.2% 15.0% 20.0% 20.8% 21.4% 19.8%
Sharpe ratio
(since inception) 0.36 (since 1994) 0.21 0.16 0.39 0.31 0.36 0.37
Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse
Table 4: Rule-based indices performance characteristics
DBLCI-MR CS MOVERS UBS CMCI DBLCI-OY
Performance Best suited for when the commod-
ity sector is in an uptrend and when
individual commodity price patterns
show strong differentiation.
Performs well in a volatile environ-
ment, with large price swings.
Outperforms long-only passive
indices when prices are falling.
Outperforms other indices when
most markets are in contango, but
underperforms when most markets
are in backwardation.
Outperforms other indices when
most markets are in contango but
can also benefit from backwarda-
tion.
Average yearly return
(since inception) 12.8% (since 1998) 17.7% 10.5% 12.2%
Volatility
(since inception) 19.2% (since 1998) 15.4% 16.4% 20.0%
Sharpe ratio
(since inception) 0.46 (since 1998) 0.97 0.48 0.47
Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

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Appendix Why is a term structure in contango?
There are three main reasons for a term structure to be in
contango: 1) short-term oversupply or weak demand funda-
mentals, 2) seasonality in the forward curve, and 3) other
technical factors that prevail in a commodity market. The first
point is the usual situation that we discussed above with our
example of the crude oil market. With regard to the second
point, there are two kinds of seasonality demand and
production. Each of these affects the term structure differ-
ently. A good example of seasonality in the forward curve is
the natural gas term structure. Due to seasonality in demand,
natural gas has to be stored until it is needed. The bulk of gas
is consumed in winter, when residential and commercial de-
mand is highest because of heating needs. As a result, natural
gas prices are higher for futures expiring in the winter season
and thus the term structure changes between contango and
backwardation. However, the curve is more often in contango
than in backwardation.
In addition, the term structure can shift into contango due
to seasonality in production. In the soft commodities market,
crops tend to arrive in the market around a specific time of the
year. Corn, for example, is mainly planted in the northern
hemisphere and is harvested between the months of August
and November. Consequently, the crop has to be stored to
ensure corn supply throughout the year. In this case, storage
is valuable and the upward slope in the term structure repre-
sents the positive value of storing the physical commodity and
carrying it over time. Because of the seasonality in supply,
demand and inventory dynamics in this market, the forward
curve can only be pushed into backwardation under extremely
tight market conditions.
The gold term structure is normally in a slight contango
due to technical factors. In the gold market, storage costs and
convenience yields are negligible. As a result, interest rates
are the main driver shaping the futures curve. In this regard,
the higher the risk-free rates, the higher the opportunity costs
for gold. In other words, the higher the interest rates, the
higher the cost of carrying a long position in gold.

New York, 9 December 2011

Research Flash US 13

Imprint
This publication has been authored by Private
Banking Global Research
US Contact Information
Investment Strategy and Advisory:

Barbara M. Reinhard, Chief Investment Strategist
Managing Director
Tel. +1 212 538 7604
E-mail barbara.reinhard@credit-suisse.com

Philipp E. Lisibach, Director
Tel. +1 212 538 0311
E-mail: philipp.lisibach@credit-suisse.com

Jimmy James, Vice President
Tel. +1 212 538 5944
E-mail: jimmy.james@credit-suisse.com

Ryan Sullivan
Tel. +1 212 538 2194
E-mail: ryan.sullivan@credit-suisse.com

Samuel Baumann, Assistant Vice-President
Tel. +1 212 538 5194
E-mail: samuel.baumann@credit-suisse.com

Scott Rosenblatt, Assistant Vice-President
Tel. +1 212 325 4458
E-mail: scott.rosenblatt@credit-suisse.com




New York, 9 December 2011

Research Flash US 14
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