Zero-Sum Game — and Where It Is Not

Futures are zero-sum in cash flows. Every dollar credited to a long is debited from a short, so across all participants the gains and losses net to nothing, and once you subtract commissions and slippage the aggregate turns negative. There are more losers than winners. Treat any pitch built on your ability to out-trade the other side of the contract as what it is.

But do not draw the wrong conclusion from that arithmetic. Zero-sum in flows does not mean zero expected return for a given position, because the two sides are not symmetric in motive. Hedgers — the farmer, the airline, the miner — come to the market to shed price risk and are willing to pay to do it. That payment is a risk premium, and it accrues to whoever takes the other side. This is Keynes’s normal backwardation, and it is the entire theoretical case for holding commodity futures as an asset class rather than as a trade.¹¹⁶ A collateralized long futures position also earns the return on the collateral, which is not a transfer from anyone.

So the honest statement is narrower and more useful than “the average return is zero”: there is a defensible reason to hold diversified, collateralized commodity futures in a portfolio (section “The “All Weather” and “All Seasons” Portfolios”), and no defensible reason to believe you will win a directional contest against the person on the other side of a single contract. The risk premium is small, inconsistent, and can be swamped by the roll costs of section “Futures Roll and Roll Yield”. Speculation is a different activity entirely, and it ends badly for most who attempt it.