Carbon And Commodities Generating Alpha With Dynamically Weighted Index

Negative Asset Prices?

Source: Bloomberg

High Volatility?

Source: Bloomberg

Relatively Stable Asset Prices?

Source: Bloomberg

AiLA Indices

We are a provider of systematic investment strategies in the global Commodities and Carbon market.

Alpha Products

Tracker Products

S Series: Low Vol & 1.5 + SharpeT Series: Tracking Illiquid Commodities with liquid commodity baskets
E Series: Alpha Products in Equity IndicesV Series: Volatility Products in Index Form

Traditional Commodity Indices

Standard Commodity Indices are typically long-only, fixed weight indices.

Implications:

  • Achieves benchmark objective
  • Fully allocated – allocations are not opportunistic
  • Exposed to cyclical commodity markets in the long term

Table 1 : Example of Fixed Weight Commodity Index Composition

GroupCommodityWeight
EnergyNatural Gas8.50%
WTI Crude Oil15.00%
GrainsSoybeans Gas7.50%
Corn10.00%
Base MetalsCopper12.00%
Aluminium8.00%
Precious MetalsGold14.00%
LivestockLive Cattle5.00%
SoftsSugar11.00%
Coffee9.00%

Standard Commodity Index

Source: Bloomberg

Dynamic Weights Example – AiLA-S030

Dynamic Weights is part of our DNA in generating Alpha

AiLA-S030 :

Investors can access a Market Neutral Absolute Return strategy focused on diversified global commodity markets.

Metrics*2017201820192020202120222023
Annual Returns (%)15.2312.1914.6822.9327.0112.861.77
Max Daily Drawdown (%)-0.72-1.84-1.96-1.85-1.68-2.42-0.26

*As of 13th January 2023

Dynamic Weights Example – AiLA-S030

AiLA focuses on Opportunistic Allocation

When to Allocate?

How much to Allocate?

*As of 13th January 2023

Upstream – When to Allocate

1

Are Expected Returns
0% in next 𝑇 +
𝑚 days?

𝑚 can be a window of 30, 45, 60 or 90 days. T is today

2

Is 𝑇 + 1 an ideal time
to initiate a position for
next 𝑚 days?

A decision today can be executed only tomorrow, hence 𝑇 + 1

3

What is the Risk for a
given set of Returns
and Timing?

What if the returns are <0%? Will that be −1% or −5% in the same time horizon of 𝑇 + 𝑚 days

4

Can risk be minimized?

Is it possible to choose a time such that for a given Expected Return and time horizon we have minimum risk

5

What is the ideal time to invest?

If so, is 𝑇 + 1 still the best time to invest or should we wait?

Downstream – How much to Allocate

  • Allocation decisions used to generate dynamic index weights.
  • Opportunistic nature result in time varying index properties, e.g. allocation, risk and market concentration.
  • AiLA follows a common approach (with a few variations) to achieve overall index design targets as well as constraints.

Downstream – Index Construction

Asset
allocation
decisions		Construct index
representing an
ideal composition		Find realistic
compromise given
targets and constraints		Index
allocation
weights

Buy CLN3

Flat ClZ3

Sell GCG3

Flat GCJ3

Unconstrained Index

  • Diversified asset weights.
  • Overall index risk target.
  • Index correlation preferences.

Constrained Index

  • Allocation and rebalancing.
  • Index, sector and asset level.
  • From design preferences as well as market liquidity.

4% CLN3

0% ClZ3

-6% GCG3

0% GCJ3

Dynamic Alpha = Opportunistic ?

  • Commodity prices include seasonality as well as other cycles…
  • Is the alpha mainly due to “here and now” dynamics…?
  • Try to remove allocation timing,
    • Create a dynamic AiLA index;
    • Convert dynamic index into fixed weights;
    • How much of original alpha is explained by fixed version?

Dynamic Index

  • Construct dynamic index using AiLA approach.
  • Commodity markets typically comprising standard fixed indices.
  • Individual long/short futures allocations, with max 12 months to expiry.

AiLA index commodities

    Agriculture

  • Wheat (CME)
  • Corn (CME)
  • Soybean (CME)
  • Coffee (ICE)
  • Sugar (ICE)
  • Cocoa (ICE)
  • Cottan (ICE)
  • Hogs (CME)
  • Cattle (CME)

    Engery

  • Crude Oil (CME/ICE)
  • Diesel (CME/ICE)
  • Gasoline (CME)
  • Natural Gas (CME)

    • Metal

  • Aluminum (LME)
  • Copper (LME/CME)
  • Lead (LME)
  • Zinc (LME)
  • Gold (CME)
  • Silver (CME)

Dynamic Index

  • Many possible contributions to historical difference…
  • Perhaps partly explained by a more AiLA like fixed index?

Convert Dynamic to Fixed

  • Fixed weights calculated using period 2011 to 2016.
  • Average weights for each day-of-year (D) and asset.
  • Scale weights to allocate 100% of capital each day.
  • Apply same (fixed) weights each year from 2017.

Convert Dynamic to Fixed

  • AiLA version of fixed index similar to standard indices.
  • Attribute alpha primarily to opportunistic AiLA weights.

Conclusions

  • AiLA is primarily involved in Carbon and Commodity markets, with two types of products – Alpha and Tracker products.
  • AiLA aims to generate consistent long term investment alpha, with a different objective from standard fixed weight commodity indices.
  • AiLA focuses on opportunistic allocation powered by a systematic process that answers the questions “when” and “how much” to invest.
  • The source of AiLA’s alpha originates from opportunistic allocation through dynamic index weights.
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