A Better Long-Only Commodity Product

Dr Mauritz van den Worm, PhD

30 January, 2020

Overview

Rough Outline

  • Introduce the GSCI Index as long-only proxy
  • Define backwardation and contango
  • Curve impact of roll ajusted price series
  • Reconstruct long-only Index
  • Performance attribution during backwardation and contango
  • Improving the long-only Index
  • Shameless propaganda

GSCI Index

BSCI Evolution

GSCI Weights by sector

GSCI Weights by commodity

GSCI Commodity Correlations

Curve Shape

Contango

Backwardation

The effect of roll yield - Corn

The effect of roll yield - Natural Gas

The effect of roll yield - WTI

Index Proxy

Index Proxy vs GSCI

Index Proxy - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.13
Sortino Ratio 0.19
Omega Ratio 0.18
Skewness -0.36
Kurtosis 1.74
Risk Statistics
Annualized Std.Deviation 18.42
Maximum Drawdown 72.98
Month to Recover 140.00
Worst Month -26.04
Losing Months (%) 44.25
Average Losing Month -4.26
Loss Deviation 3.68
Return Statistics
Last Month 0.17
Year To Date 0.17
3 Month ROR 6.92
12 Month ROR 6.47
36 Month ROR 7.50
Total Return 99.72
Compound ROR 2.41
Best Month 20.12
Winning Months (%) 55.75

Index Proxy - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 20.12 24.44 43.92 79.12 107.06 145.77 218.54
Worst -26.04 -43.34 -56.88 -52.60 -55.86 -55.96 -57.82
Average 0.34 1.14 2.40 5.15 10.85 15.76 30.65
Median 0.65 1.86 2.84 2.89 5.95 8.75 8.53
Last 0.17 6.92 3.80 6.47 -3.27 7.50 -11.20
Winning (%) 55.75 56.07 58.60 57.86 56.31 57.51 59.17
Avg. Pos. Period 3.99 8.08 12.29 21.06 35.60 44.53 70.18
Avg. Neg. Period -4.26 -7.71 -11.59 -16.70 -21.03 -23.16 -26.64
# Of Periods 348.00 346.00 343.00 337.00 325.00 313.00 289.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-72.98 140 NA 2008-07-31 NA
-50.12 44 18 1997-01-31 2000-08-31
-28.29 26 12 2000-12-29 2003-01-31
-25.37 53 24 1991-11-29 1996-03-29
-17.42 15 9 2006-08-31 2007-10-31

Index Proxy Performance Attribution - WTI Crude Oil

Index Proxy Performance Attribution - Natural Gas

Index Proxy Performance Attribution - Corn

Curve Shape and Annualised Return

Backwardation Mask

Basic Idea

  • Only take long exposure in those commodities whose curves are in backwardation
  • Define the spread

\[ S_{C,K} := P_{C,K} - P_{C,K'} \]

for each commodity \(C\) as the price difference between the front contract \(K\) and deferred contract, twelve months out from the front contract, \(K'\).

  • If \(S_{C,K}\) < 0 the curve is in contango
  • If \(S_{C,K}\) > 0 the curve is in backwardation

Long Backwardated - Equity Curve

Backwardation Mask - Weight Evolution

Backwardation Mask - Number of Commodities

Backwardation Mask - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.70
Sortino Ratio 1.09
Omega Ratio 0.89
Skewness 0.39
Kurtosis 1.99
Risk Statistics
Annualized Std.Deviation 9.45
Maximum Drawdown 15.87
Month to Recover 35.00
Worst Month -9.19
Losing Months (%) 43.68
Average Losing Month -1.47
Loss Deviation 1.75
Return Statistics
Last Month 0.09
Year To Date 0.09
3 Month ROR 5.70
12 Month ROR 5.63
36 Month ROR 15.76
Total Return 537.43
Compound ROR 6.60
Best Month 10.03
Winning Months (%) 56.32

Backwardation Mask - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 10.03 21.52 25.19 54.59 82.57 97.21 156.07
Worst -9.19 -9.91 -9.73 -12.58 -15.60 -11.70 -6.92
Average 0.57 1.73 3.50 7.40 16.15 25.56 50.41
Median 0.17 0.48 0.99 2.39 8.23 21.94 41.97
Last 0.09 5.70 2.84 5.63 5.93 15.76 14.08
Winning (%) 56.32 58.09 60.35 66.77 76.00 82.75 89.62
Avg. Pos. Period 2.15 4.50 7.53 12.93 22.83 32.00 56.58
Avg. Neg. Period -1.47 -2.10 -2.63 -3.73 -5.02 -5.33 -2.91
# Of Periods 348.00 346.00 343.00 337.00 325.00 313.00 289.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-15.87 35 8 1997-01-31 1999-11-30
-13.66 53 27 1991-11-29 1996-03-29
-13.43 9 7 2003-03-31 2003-11-28
-12.71 46 21 2014-07-31 2018-04-30
-10.65 22 8 2000-12-29 2002-09-30

Custom Long-Only Portfolio

Basic Idea

Here we combine the three ideas

  • Take long exposure in backwardated commodities
  • Explore two parts of the curve
  • Add 5 different roll schedules

Custom Long-Only Portfolio - Equity Curve

Custom Long-Only Portfolio - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.60
Sortino Ratio 0.96
Omega Ratio 0.76
Skewness 0.40
Kurtosis 1.64
Risk Statistics
Annualized Std.Deviation 18.09
Maximum Drawdown 32.45
Month to Recover 68.00
Worst Month -15.67
Losing Months (%) 43.97
Average Losing Month -2.98
Loss Deviation 3.28
Return Statistics
Last Month 0.26
Year To Date 0.26
3 Month ROR 12.89
12 Month ROR 10.33
36 Month ROR 16.88
Total Return 1929.89
Compound ROR 10.94
Best Month 19.27
Winning Months (%) 56.03

Custom Long-Only Portfolio - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 19.27 48.37 65.35 120.02 215.27 284.27 539.74
Worst -15.67 -26.13 -28.48 -27.68 -31.95 -32.45 -27.44
Average 1.00 3.09 6.33 14.07 32.69 53.51 119.23
Median 0.33 0.88 1.50 2.88 10.35 36.73 77.31
Last 0.26 12.89 9.25 10.33 -1.45 16.88 13.39
Winning (%) 56.03 56.07 58.02 56.08 67.08 76.04 79.24
Avg. Pos. Period 4.13 9.01 15.41 31.29 53.86 74.40 154.21
Avg. Neg. Period -2.98 -4.46 -6.21 -7.93 -10.45 -12.78 -14.32
# Of Periods 348.00 346.00 343.00 337.00 325.00 313.00 289.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-32.45 68 NA 2014-07-31 NA
-32.44 37 10 1997-01-31 2000-01-31
-26.08 26 12 2000-12-29 2003-01-31
-24.50 53 14 1991-11-29 1996-03-29
-19.20 9 7 2003-03-31 2003-11-28

Trend System on GSCI Commodities

Basic Idea

  • Use the Polar Star Trend System on a universe defined by the GSCI commodities
  • Added diversification by adding long and short positions in trending markets

Trend System on GSCI Commodities - Equity Curve

Trend System on GSCI Commodities - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.55
Sortino Ratio 1.23
Omega Ratio 0.64
Skewness 0.98
Kurtosis 2.75
Risk Statistics
Annualized Std.Deviation 23.44
Maximum Drawdown 42.13
Month to Recover 41.00
Worst Month -12.85
Losing Months (%) 46.04
Average Losing Month -4.17
Loss Deviation 3.02
Return Statistics
Last Month 0.66
Year To Date -0.78
3 Month ROR 0.82
12 Month ROR 13.73
36 Month ROR -24.21
Total Return 3003.21
Compound ROR 12.85
Best Month 32.35
Winning Months (%) 53.96

Trend System on GSCI Commodities - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 32.35 65.19 78.93 104.30 151.85 249.49 287.80
Worst -12.85 -18.22 -23.14 -25.26 -39.65 -35.82 -5.86
Average 1.23 3.69 7.58 15.62 33.31 55.17 109.09
Median 0.49 2.58 5.02 11.92 29.69 49.70 79.58
Last 0.66 0.82 -0.78 13.73 -9.90 -24.21 7.84
Winning (%) 53.96 59.59 61.90 70.00 81.76 85.29 97.87
Avg. Pos. Period 5.84 10.65 17.17 26.75 44.23 67.45 111.55
Avg. Neg. Period -4.17 -6.58 -8.01 -10.35 -15.64 -16.02 -4.18
# Of Periods 341.00 339.00 336.00 330.00 318.00 306.00 282.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-42.13 41 NA 2016-03-31 NA
-28.57 29 7 2001-11-30 2004-03-31
-25.79 22 5 2009-03-31 2010-12-31
-25.67 41 20 2011-05-31 2014-09-30
-25.02 22 6 2004-04-30 2006-01-31

Trend System on Extended Universe of Commodities

Basic Idea

  • Use the Polar Star Trend System on an extended universe of commodities

  • Diversification added by

    • Long and short positions in trending markets
    • Extended universe of commodities
    • Look at different parts of the curves

Trend System on Extended Universe of Commodities - Equity Curve

Trend System on Extended Universe of Commodities - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.82
Sortino Ratio 1.95
Omega Ratio 1.03
Skewness 1.53
Kurtosis 7.20
Risk Statistics
Annualized Std.Deviation 21.68
Maximum Drawdown 41.79
Month to Recover 47.00
Worst Month -11.32
Losing Months (%) 43.11
Average Losing Month -3.48
Loss Deviation 2.62
Return Statistics
Last Month 0.59
Year To Date 3.16
3 Month ROR 5.23
12 Month ROR 19.71
36 Month ROR 1.18
Total Return 10227.97
Compound ROR 17.73
Best Month 44.08
Winning Months (%) 56.89

Trend System on Extended Universe of Commodities - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 44.08 84.24 116.12 165.97 272.37 367.65 469.46
Worst -11.32 -15.25 -26.58 -28.72 -35.94 -37.96 -19.35
Average 1.55 4.79 9.96 21.13 46.60 77.05 155.78
Median 1.08 3.58 7.85 17.71 39.30 64.06 147.07
Last 0.59 5.23 3.16 19.71 10.30 1.18 44.71
Winning (%) 56.89 64.31 69.05 74.24 84.28 87.91 97.16
Avg. Pos. Period 5.37 10.59 17.90 31.87 58.18 90.04 160.69
Avg. Neg. Period -3.48 -5.68 -7.78 -9.83 -15.49 -17.39 -12.35
# Of Periods 341.00 339.00 336.00 330.00 318.00 306.00 282.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-41.79 47 14 2011-03-31 2015-01-30
-28.64 46 NA 2015-10-30 NA
-26.48 18 6 2004-08-31 2006-01-31
-19.32 20 2 2009-03-31 2010-10-29
-15.87 7 3 1993-06-30 1993-12-31

Polar Star Diversified Commodity Fund

Polar Star Diversified Construction

  • Allocate to the three underlying USD funds
    • Polar Star Limited
    • Polar Star Spectrum
    • Polar Star Quantitative


  • Weights determined using
    • Bootstrapping procedure
    • Determine baseline weightings
    • Black-Litterman
    • Add PM views
    • Rebalance quarterly

Polar Star Diversified Commodity Fund - Equity Curve

Polar Star Diversified Commodity Fund - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 1.14
Sortino Ratio 2.46
Omega Ratio 1.31
Skewness 0.28
Kurtosis 0.23
Risk Statistics
Annualized Std.Deviation 9.77
Maximum Drawdown 8.21
Month to Recover 8.00
Worst Month -5.32
Losing Months (%) 38.24
Average Losing Month -1.85
Loss Deviation 1.31
Return Statistics
Last Month -2.91
Year To Date 2.85
3 Month ROR 3.71
12 Month ROR 2.85
36 Month ROR 17.14
Total Return 145.78
Compound ROR 11.16
Best Month 8.36
Winning Months (%) 61.76

Polar Star Diversified Commodity Fund - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 8.36 14.51 24.89 45.02 63.57 73.66 111.46
Worst -5.32 -6.12 -6.12 -2.62 -2.56 9.95 33.58
Average 0.92 2.80 5.70 11.74 25.38 41.28 75.04
Median 0.69 2.54 4.47 8.78 21.76 43.94 75.11
Last -2.91 3.71 -1.55 2.85 14.24 17.14 33.58
Winning (%) 61.76 74.00 83.51 93.41 98.73 100.00 100.00
Avg. Pos. Period 2.64 4.76 7.41 12.64 25.74 41.28 75.04
Avg. Neg. Period -1.85 -2.77 -2.94 -1.05 -2.56 NaN NaN
# Of Periods 102.00 100.00 97.00 91.00 79.00 67.00 43.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-8.21 8 NA 2019-06-30 NA
-7.82 10 2 2016-10-31 2017-07-31
-6.12 5 2 2014-01-31 2014-05-31
-5.75 7 3 2015-12-31 2016-06-30
-5.32 4 3 2013-01-31 2013-04-30

Bootstrapping Procedure - Outline

Bootstrapping Procedure - Benchmark Weights

Black-Litterman Overview

  • Bayesian approach to portfolio construction (video with good insights)
  • We use Idzorek’s extension
  • Add PM view and confidence to tilt allocation towards
    • funds with higher expected returns, and
    • funds with greater confidence

Black-Litterman Baseline

Limited Quant Spectrum
count 30.00 30.00 29.00
mean 2.81 2.19 4.37
std 1.97 1.99 4.43
min 0.39 0.04 0.15
25% 1.08 0.90 1.20
50% 2.48 1.71 2.85
75% 3.57 2.64 6.30
max 7.41 7.66 16.68
number of months 60.00 60.00 55.00
Positve Percentage 50.00 50.00 52.73
Equilibrium Weight 38.20 36.80 25.10

Black-Litterman Tilt

Summary

Long-Only in a nutshell

  • The curve shape dominates the returns from commodities
  • Lony-only commodities only work in backwardated markets
  • Better risk adjusted returns can be achieved by
    • adding short positions
    • extending the investible universe
    • adding risk management

Polar Star Diversified as an alternative

  • Exposure to three funds with diversification accross
    • Return streams
    • Strategies
    • Commodities
  • Outperforms long-only on absolute and risk adjusted basis
  • Dedicated commodities reseach and execution team
  • 93+ Years worth of commodity trading experience