A quant’s guide to finding alpha in commodities trading
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Hi, and welcome to JPMorgan's Making Sense. I'm Eloise Goulder, and today I'm delighted to be sitting down here in New York with Kranthi Garde, who is Head of Global Macro QIS Product Structuring, to discuss the commodity space and macro overall. So, Kranthi, thank you so much for joining us here today. Thanks for having me. It's a pleasure. So, Kranthi, could you start by introducing yourself and your background and your mandate here at JPMorgan?
Yes, I joined JP Morgan in October 2025 to head the global macro QIS product structuring. Before that, I spent 17 years in this space, focused more on commodities, but also FX. So right now, my mandate is broader, which includes commodities, FX, and rates.
And it's worth noting QIS, standing for Quantitative Investment Strategies, is really about extracting systematic alphas from a given asset class. And we've spoken to many of your colleagues, Kranti, on this podcast series, including Rui Fernandez and Arnaud Jobeur. So, Kranthi, could we dive into the commodity space? Because there's clearly been a lot of volatility in this asset class this year, with precious metals, both gold and silver, rallying hard into late January this year, and then the energy space rallying into, and in fact, since the geopolitical conflict in March. So, Kranthi, how do you go about extracting alpha in this asset class? And why do you find the commodity space so compelling?
Yeah, so I would say one thing that is very different about commodities is that it's a physical asset class. So you have a lot of price insensitive consumers, producers who need to hedge their production or consumption irrespective of the price level. And commodities is also very uncorrelated to equities and bonds. So it provides diversification and potential for uncorrelated returns. And even within commodities, energy, metals, agriculture behave very differently. So within like 20, 25 different commodities, you get a lot of diversification. So quantitative strategies can exploit the inefficiencies in futures curves, seasonality, and also cross-market relationships, which are often overlooked by discretionary investors. So just to stress the importance of commodities in QIS context, in a typical long-only portfolio, investment managers can have 5% to 10% of commodities,
Mostly to hedge inflation, but in a long short portfolio, that can be as high as 30 to 40%, which is second only to equities. And why is it that quant investment managers so often have that higher weighting towards commodities? Is it a function of that diversification benefit? So the diversification benefit is one, but also the richness of the asset class when it comes to these kind of strategies. As I mentioned, there are a lot of producers and consumers who tend to be price insensitive. There's a lot of index flows that you can monetize. That makes sense. And can you give an example of one of these strategies, perhaps focusing on trend? Sure. Trend is like a very well-known strategy across asset classes and specifically for commodities. CTS actually stands for Commodity Trading Advisors. It's named after commodities. So these trend strategies took hold in commodities. And why does trend work?
Because commodities is a physical market, so the supply and demand, they have to balance. So a small dislocation can lead to prolonged trends. Like we saw more recently, it's been a bigger disruption. But if you take out, for example, an oil market, which is 100 million barrels a day per market. And if you take out like 1 million barrels a day, the market has to balance. So to force that, prices have to go up. And so that leads to these prolonged trends, which can be captured by systematic strategies.
And coming back to what we've seen this year, I mentioned earlier the rally in precious metals into late Jan and then the rally in the energy segment. These have obviously been very powerful trends, but on the other hand, they have had sharp reversals. So how have commodities trend strategies performed this year?
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