TD Alternative Commodities Pool

futures contracts, investors don’t need to allocate 100% of the funds to purchase the contract – only a portion of it (like a down payment when purchasing a house). The down payment required (margin) for futures contracts is often only between 10% - 12% of the contract purchase price. Therefore, full exposure to the desired commodity may be obtained with only having to provide a fraction of the contract's notional value (roughly 10%).  The excess funds that would have been allocated to that investment can be deployed elsewhere, i.e. in interest bearing cash equivalents, potentially boosting the total return of the investment.

Return boosting opportunities
Returns from investing in commodity futures usually come from three main sources:  Spot price, roll and collateral returns.

• Spot price returns are simply the price gain or loss on the derivative purchased.
• Roll returns are profits or losses generated when investing in the futures market due to the price difference between futures contracts with different expiration dates. Roll yields can be positive or negative, depending upon whether the market is in backwardation or contango. A curve in backwardation (closer maturity dates are more expensive than maturity dates further out) results in positive roll yield. A curve in contango (closer maturity dates are cheaper than longer maturity dates) results in negative roll yield.
• Collateral returns are earned on the excess cash not invested due to the lower margin requirements for futures contracts (explained above). This significant amount of available capital can be invested in liquid investments such as cash and cash equivalents, like Treasury Bills (T Bills) to help boost the overall return. 
• Examples of spot, roll and collateral returns To help illustrate the driver of total return, we go through three hypothetical examples that show spot, roll and collateral returns. For simplicity, we ignore marking-to-market and maintenance margin (including the potential for a margin call).

Spot and collateral return example:
Let's suppose an investor purchased a December 2024 crude futures contract for $70 on January 2, 2024, and sold it on June 28, 2024, for $78. During the holding period, the investor would need to deposit roughly $7 of the $70 investment (10%) in margin. This leaves an additional $63 to earn a yield during the holding period. The investor purchases $63 worth of 3-month T Bills @ 5.3%. Over the 6-month holding period and eventual sale of the contract, the investor experienced a gain of $8 on the contract and an additional $1.67 income return on the invested collateral. Due to the collateral yield from the T Bills, the total return was boosted from 11.4% (spot return only) to 13.8% (spot and collateral return).

investor "rolled" this exposure by selling a June 2024 contract for $78 and buying a December 2024 contract for $75.50 resulting in a roll return of $2.50. Once again, during the holding period, the investor would only need to deposit $7 of the $72 investment (10%) in margin. This leaves the additional $63 to earn a collateral yield during the holding period. Again, the investor purchased $63 worth of 3-month T Bills @ 5.3% and held them until September 3, 2024, for an additional income of $2.38.

In this example, despite ultimately losing $2 on the spot return ($70 - $72), the investor still managed to generate a 4% return based on the roll and collateral return contributions.