Bailin argues that by using UNG and UNL together, an investor can benefit from the persistent level of contango, with less volatility.
“Those inclined to believe that natural gas prices are likely to remain low until the supply glut abates can capture a contango-driven gain by shorting UNG,” Bailin said. “At the same time, establishing a long position in UNL will hedge out much of the return associated with movements of the spot price. If one were to have invested in such a strategy since January 2010, when both products were available for trade, he would have done quite well. Spreading UNG against UNL and rebalancing to 50/50 on a monthly basis received a 5% annualized return.”
“The strategy’s volatility, as measured by standard deviation, would have been a mere 2%,” Bailin added.
United States Natural Gas Fund
For more information on the natural gas market, visit our natural gas category.
Max Chen contributed to this article.