When commodity funds increase their size through incoming financial resources, portfolio managers may upscale the standing portfolio thus preserving portfolio weights. Alternatively, they may update portfolio composition, possibly tackling new investment opportunities, or implementing any combination of the two. These solutions all entail additional costs related to searching actions and liquidity issues affecting the assets. Whatever is the retained choice, it in principle has a varying impact on fund performance. We develop in this paper a model that incorporates liquidity frictions in performance measurement. This model recovers the stylized fact that funds performance usually decreases with size. Its main contribution is that it enables prescribing how funds portfolio managers should invest new incoming resources in order to maximize portfolio performance under liquidity constraints. We assess our model empirically on a dataset of commodity futures contract. One major result that we get is that the proportion of wealth invested in liquid commodity contracts should increase with fund wealth at the expense of less liquid contracts, whatever the return over volatility ratios of these assets.
LECESNE, L. and RONCORONI, A. (2016). How Should Commodity Funds Decisions and Performance React to Size-Driven Liquidity Frictions? In: Energy & Commodity Finance Conference 2016 (Ecomfin).