Almost by definition, alternative investments are constantly in a state of flux.  While other disciplines – and even other branches of investment management itself – tend to build upon themselves over time, the alternative investment industry must continually re-evaluate where its been and where it is going.  For us, this requires a focus on new and emerging ideas and an open dialogue that has become synonymous with blogs.  For the Chartered Alternative Investment Analyst (CAIA) Association this requires that its curriculum be constantly re-evaluated and modified.

To that end, the CAIA Association has recently launched its latest curriculum modifications. Beyond being of critical importance for current candidates, these changes are also closely watched by current charter holders and by other professionals as an early indication of which recent industry developments are likely to become an enduring part of the alternative investment landscape.

In today’s guest contribution, the CAIA Association’s Hossein Kazemi discusses one such topic: oil futures.

Special to AllAboutAlpha.com by: Dr. Hossein Kazemi, Program Director, CAIA Association.

Oil is 150 years old.  Exactly 150 years ago Edwin Drake, who was hired by Seneca Oil, drilled a 69.5 feet hole discovering oil in Titusville, Pennsylvania.  Since then, oil has had a profound impact on the world history. Oil is more than a commodity. Numerous wars have been waged to secure it, revolutions have taken place to nationalize it and fortunes have been made and lost producing and trading it.  When oil prices increased by 525% from January 2001 through July 2008, consumers, producers and national governments sought answers and began looking for reasons (scapegoats?) for this sudden rise in oil prices.

Unlike previous episodes of spikes in oil prices where OPEC and other oil producers were blamed by the public and the media, this time speculators in futures market were accused to be the main villain.  It was common to hear that 60% of the rise in the price of oil was due to speculative activities.

In a paper titled “The Oil Markets: Let the Data Speak for Itself” Hillary Till attempts to clear up the misunderstanding and let the data tell the story.  Till argues that fundamental factors (i.e., demand and supply) are much more important to the rise in the price of oil than the behavior of speculators in financial markets. She discusses the opaque nature of the oil markets where accurate estimates of current and potential supplies and demands are not available and therefore price fluctuations are exaggerated because of uncertainty about these fundamental factors. Till acknowledges that transactions in futures market may impact the oil price and drive it away from its fundamental value in the short-run, but she is skeptical about the medium-term impact of these transactions.  Through meticulous research, Till shows that unexpected increases in demand by China, especially leading up to 2008 Beijing Olympics was the primary reason for oil prices reaching $150 per barrel in July 2008.  Till points to the sharp increase in Baltic Dirty Index as evidence that Chinese were importing oil at a very high level in preparation for summer Olympics (See Figure 14 from the text). More…