V. 1:1 (14-14): Risk Management by JOHN E. ROSENSTOCK

Risk Management by JOHN E. ROSENSTOCK

The portfolio approach to commodity trading is a big selling point for commodity funds. ("Portfolio approach" is diversifying and spreading risk through a completely mechanical trend analysis.) However, history has shown that the mechanical trend following systems that maintain positions in all commodities all the time tend to generate heavy commissions and sustain unnecessary losses when prices enter narrow trading ranges. Trend following by definition is a lagging indicator. In a trading range, prices move back and forth, violently changing direction every two or three days. Under these conditions, trend following systems wind up buying near the top and selling near the bottom, often many times before prices finally keep moving in one direction! Also, there is a school of thought which questions the redundancy of being long Swiss francs, Deutschemarks, and Japanese Yen, all at the same time. Many investors in commodity funds using trend following systems lost heavily in the "October 79 massacre'' when the President announced his famous dollar support program.