The two indices will track the performance of investments in a small set of liquid commodities, Reuters reported. The base index is the Deutsche Bank Liquid Commodity Index (DBLCI) and is composed of aluminum, gold, sweet light crude oil, heating oil, wheat, and corn. Each commodity has a constant weighting, reflecting world production and inventory. The second index is the Deutsche Bank Liquid Commodity Index-Mean Reversion (DBLCI-MR).
Kevin Rodgers, Head of Correlation Trading at Deutsche, told Reuters there were two reasons for launching the indices. “More people are looking to commodities and other non-traditional assets,” he said. “There’s been a big decline in equity markets and yields in fixed income are at historic lows.”
The DBLCI-MR is designed to capitalize on the recurring characteristic of commodities and applies these in a rule-based methodology.
Commodities tend to trade within wide but defined ranges due to the simple economic principles of supply and demand, according to a Deutsche statement quoted by Reuters. As prices rise, supply increases and there is a simultaneous fall in demand. The opposite applies when prices fall below their long-term averages. The net effect is to keep commodity prices around their long run average price.
The DBLCI-MR uses variable weights for its constituent assets, depending on price deviations from long-term averages. The indices are quoted in total return terms representing returns both on commodities and the cash sum invested, calculated in US dollars. The Deutsche statement said back testing of the indices showed the DBLCI generated average annualized returns from 1988 to 2002 of 10.7% with 11.9% for the DBLCI-MR.