Seasonality Analysis

Background

• AiLA strategies are classified as based on seasonality, event-driven and Trade flow
• AILA Seasonal strategies include seasonal constituents and non-seasonal constituents
• Seasonal constituents are characterized by price variations driven either by supply variation or demand variations over a 12-16 month cycle
• Commodities with a price variation over a longer economic cycle are considered as Non-Seasonal
• For the purpose of this analysis, we have categorized sector constituents as below
  • Seasonal: Agriculture, Oil and Gas
  • Non-Seasonal: Base and Precious Metals

Key Questions

• Do seasonal constituents indeed provide an edge in terms of risk adjusted performance?
• What is impact on the overall performance by combining Seasonal and Non-Seasonal constituents in a single strategy?
• Do Non-Seasonal constituents degrade overall performance?

Approach

• AILAF010 Seasonal and diversified long/short global commodity strategy is used for the analysis
• The individual daily return streams from the strategy over the period Jan 2017 - Jan 2026 are grouped in the following order

Seasonal

Non-Seasonal

The two return streams form the basis for the analysis

Performance Comparison

• Cumulative returns are compared across the entire period from Jan 2017 to Jan 2026
• As observed, the Seasonal group is the main contributor to the overall strategy returns which is primarily on account of larger number of constituents
• The seasonal group additionally benefits from diversity across sectors and regions while the Non-Seasonal group is concentrated in Metals

• Sharpe ratio is a better metric to compare the risk adjusted performance of the two groups
• From the adjacent figure we see that Seasonal has a higher Sharpe ratio (1.66) in comparison to Non-Seasonal (1.08)
• The Sharpe Ratio of the overall strategy is however better than both the groups implying a complementary impact between the two groups

• To further understand the impact between the groups, the correlation between the daily return streams groups was examined
• As observed from the chart there is a very insignificant correlation between the two groups (Correlation = 1.24%)
• This implies that the Non-Seasonal group reduces the volatility in the overall portfolio, also provides an explanation for the improved Sharpe ratio of the overall portfolio

• Another factor examined is the breakdown of the capacity allocation between the groups (Seasonal: 80.97%, Non-Seasonal: 19.03%)
• The low correlation and the complementary impact implies that the inclusion of Non-Seasonal constituents in the strategy provides opportunities to enhance the allocation capacity

Conclusions

• Seasonal constituent group is the primary performance driver for the portfolio providing consistent returns over the period with an overall Sharpe ratio of 1.66
• Non-Seasonal group underperforms the Seasonal group and has a lower Sharpe ratio of 1.08
• There is insignificant correlation between the return streams
• The performance and Sharpe ratio of the overall strategy, performs better than either of the two seasonal and non-seasonal with higher Sharpe ratio of 1.95
• This implies the Non-Seasonal constituents complement the Seasonal constituents in having a favorable impact on the overall return and risk profile of the strategy
• This favorable impact can be attributed to
  • Reduced portfolio volatility because of low correlation between the Seasonal and Non-Seasonal group return streams
  • Non-Seasonal providing enhanced allocation capacity to the strategy further reducing volatility