Investment Considerations in Commodity Futures

Commodities investment plays a vital role in portfolio diversification and risk management. Within this realm, commodity futures are particularly significant due to their ability to provide leverage and hedging opportunities. Consider the case of a hedge fund manager who wishes to allocate a portion of the fund’s capital to commodity futures to hedge against inflation and to gain exposure to commodity price movements.

Discuss the key considerations the manager should evaluate when investing in commodity futures, including but not limited to the liquidity of futures contracts, implications of contango and backwardation, and the role of futures in risk management. Additionally, assess the potential advantages and disadvantages of using commodity futures as an investment strategy.