Interview with K. Geert Rouwenhorst of Yale University

In this interview, I would like to explore how academic research can inform the practice of asset management, and how insights gained from practice, in turn, shape one's perspective as a researcher and teacher.In addition to your academic career at Yale, you have been directly involved in asset management through SummerHaven Investment Management.Could you begin by describing how SummerHaven was formed and the key challenges you faced in launching the firm?K. Geert Rouwenhorst: We started in 2009, just after the Great Recession.As a startup money manager, it was understandably difficult to raise money from institutional clients without a proven three-to five-year track record.A common conundrum for new asset managers is that you need an established track record to raise assets, while at the same time you need assets to build a track record.We faced this challenge: How to get around this chicken-and-egg problem?To overcome the hurdle of time, SummerHaven launched a commodity ETF designed to provide diversified exposure to commodity futures for retail investors.While not the first commodity-linked ETF, SummerHaven's offering was innovative because it referenced an index that on a monthly basis reweights and rebalances positions across a subset of the commodity universe, while maintaining diversified exposure across all major commodity sectors.This was in 2010, still relatively early days for futures-based ETFs, when issuers and regulators were just beginning to explore the potential of actively managed ETFs.It took almost a year to gain regulatory approval for SummerHaven's rules-based "dynamic commodity index," but the timing turned out to be fortunate.Quantitative easing by the Fed elevated investor concerns about inflation and sparked renewed investor interest in commodities and inflows into the asset class.The successful ETF launch enabled us to seed the firm by raising our first assets through a public market product, which bought the time to build a track record in our private fund aimed at institutional investors.Fabozzi: Can you describe your investment philosophy and how it guides your portfolio management decisions?Rouwenhorst: SummerHaven's investment philosophy centers on systematic investing grounded in a deep understanding of market fundamentals.Investment ideas must have an economic rationale for existing, rather than relying on temporary mispricing that can be quickly arbitraged away.We specialize in commodity futures markets, where our approach connects market prices to the fundamental characteristics of the underlying physical markets.Commodity futures markets exist to facilitate the transfer of price risk between participants who are naturally exposed to such risk in the course of their businessproducers, hedgers, and consumers-and those willing to assume price risk in exchange for compensation, typically speculators or financial investors.We analyze the balance among these different types of market participants and how their interactions influence both the supply and demand for physical commodities and the capital invested in derivatives markets.