Approach:

• Based on the AiLA allocation strategies, construct a portfolio with the following target properties,
  • Maximum percentage of capital allocated is 100%.
  • Notional long vs short exposure is zero at portfolio level, i.e. referred to as net-zero exposure.
  • Net-zero exposure also to be achieved within different commodity groups of the portfolio.
  • The net-zero criteria is only approximate, where a certain level of deviation from zero is acceptable.
  • If necessary, not allocating to a certain commodity group is acceptable, e.g. due to the lack of AiLA allocations.
• The commodity groups are defined together with two target parameters,
  • Max total allocation of the commodity group.
  • Max net-zero deviation limit of the commodity group.

Questions:

• How well can the net-zero criteria be achieved?
• How does the net-zero criteria impact the portfolio performance?
• How does the commodity groups impact the portfolio performance?

• Net-zero criteria achieved well at group and portfolio level for the default commodity groups, before the liquidity constraints are imposed.

• However, criteria cannot be guaranteed on each single day when liquidity/rebalancing constraints are included (similar at portfolio level).

Setup

• Net-zero portfolio based on default commodity groups.
• Max total (group) allocation is unconstrained, i.e. max = 100%.
• Max net-zero (group) deviation limit same for all groups and reduced from 100% (unconstrained) to 5%.

Tendency of portfolio performance

• Reducing the limit by which the commodity groups are allowed to deviate from net-zero,
• The risk adjusted return tends to become lower,
• However, several historical drawdowns also being reduced, e.g. 2020 March.

Setup

• Same as for reducing max net-zero deviation limit results above.
• Except, using a larger number of smaller commodity groups (S).
• Grain and Energy (default) groups are split into one group per commodity, e.g. WTI is one group.
• Grain and Energy groups chosen due to more different as well as liquid contracts, compared to other default groups.

Tendency of portfolio performance

• Introducing many/smaller groups tend to limit the occurrence of simultaneously being long and short.
• Tends to be more similar to portfolio of individual assets, i.e. no net-zero group constraints.

• An AiLA portfolio with net-zero criteria at a commodity group level appears achievable within relatively small deviations specified by the input parameters, given the set of commodities and groups investigated.
• The liquidity constraint cause some additional deviation, beyond the limits specified by the input parameters, however, to a relatively modest extent.
• The portfolio performance tends to decrease on a risk adjusted basis with a decreasing net-zero deviation limit, however, often also with historical drawdowns being reduced.
• The number/size of the commodity groups tends to be a compromise between sufficiently many assets, that can be simultaneously long and short, and similarity/correlation between the asset PnL.

Mixed Compromise Scenario?

• No max group allocation limit.
• Net-zero group limits:
  • Energy: 10% (many correlated contracts)
  • Others: 20% (more diverse groups).
• Slightly less historical drawdowns, while most of unconstrained performance?