Alpha Exchange

The distribution of asset price returns is a subject of much study in the literature of empirical finance. We know, of course, that equity returns are left-tailed, subject to the occasional violent plunge. But other asset classes are different, and in this context it was a pleasure to welcome Ben Hoff, Global Head of Commodity Strategy at Société Générale, to the Alpha Exchange. Ben describes commodities as a dual system — one that exists both physically and financially. This duality means real-world frictions such as storage, transport, and substitution shape risk and return in ways financial models often miss. Unlike equities, where the volatility risk premium (VRP) is structural and macro-driven — investors chronically overpay for protection against crashes — the commodity VRP is episodic and micro-driven, emerging only when the physical system’s natural buffers are overwhelmed. Ben likens the commodity ecosystem to a CDO structure of risk absorption. The first-loss tranche is “optionality in time,” where