Introduction

AiLA strategies often comprises outright futures assets with opportunistic allocations targeting certain risk/reward objectives.
AiLA strategies can, however, also accommodate futures spreads, where the spreads are treated as an asset following some common definitions.
Note: the examples and results here only address intra-commodity spreads, where other types will be discussed in future decks.

Spread Definition

The AiLA methodology treat spreads as a single asset, with an associated allocation weight (w).
For an intra-commodity spread the allocation weight is used to calculate the position based on the leg with highest (USD) price.
Both legs in the spread are then assigned the same positions in terms of number of contracts.

e.g.

WTI calendar spread M24 [82.82 $/bbl] vs Z24 [77.89 $/bbl],
with AUM = 100M and w = 1%,
would corresponds to12 lots M24 long and 12 lots Z24 short,
based on maximum price leg M24.

Spread Return and Notional

Portfolio

Spread Caps:

Different position and trade constraints from outright portfolios.
Max sum(|w|) < 200%
Max spread weight < 50%
Spread specific weight (liquidity) caps.

Typically, larger asset weights than outright portfolios to achieve reasonable risk, given smaller spread returns.

Performance

Spread Portfolio:

Max drawdown (peak-to-trough): -4.8%
Nr month: 62 (pos) 27 (neg) 69% (% pos)
Return Statistics

Statistic	Day	Week	Month	Quarter
Avg Return	--	0.2%	0.9%	2.7%
STD Return	0.4%	0.7%	1.7%	3.2%
Max Loss	-2.1%	-2.1%	-4.3%	-4.2%

Outright portfolio:(similar set of commodities)

Correlation: 23% (D), 32% (W), 36% (M), 54% (Q).
Max diversification at about 50/50 strategy weights, when operated at their individual risk levels.
Indicate a noticeable diversification benefit, despite slightly positive correlation.

Conclusions

In this deck the method to include spreads in an AiLA strategy is described, and the results from a commodity spread portfolio was compared to a similar outright futures assets portfolio.
The smaller spread returns requires an increased spread asset weight than for out right portfolios, however, a relevant portfolio risk still appears to be achievable.
The performance of the spread portfolio is shown to be comparable to the outright portfolio over the same history, and indicate a noticeable diversification benefit, despite a slightly positive correlation.
The current deck only address the AiLA method used for intra-commodity spreads, where other spread types will be addressed in future decks.

In average, results suggest that exit at close on T+1 is as good or slightly beneficial with respect to earlier exit options, both when exit triggered by a stoploss as well as a target.

Appendix

Portfolio Constituents

Aluminum Month 1 vs Month 3 Spread
Soybean July vs November Spread
Soybeans Front November vs Deferred November Spread
Soybean Oil July vs December Spread
Brent June vs December Spread
Brent Front December vs Deferred December spread
Copper Month 1 vs Month 3 Spread
Corn July vs December Spread
Corn Front December vs Deferred December Spread
Cotton July vs December Spread
Gas Oil June vs December Spread
Gold Month 1 vs Month 3 Spread
Heating Oil June vs December Spread
Arabica Coffee July vs December Spread
Kansas Wheat July vs December Spread