Debunking Long-Only Commodity Investing

Dr Mauritz van den Worm, PhD

18 July, 2019

Overview

Rough Outline

  • Introduce the BCOM 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
  • Alternative strategies
  • Polar Star Diversified Portfolio

BCOM Index

BCOM Evolution

BCOM Weights

Aggregated Weights

Curve Shape

Contango

Backwardation

The effect of roll yield - Corn

The effect of roll yield - Natural Gas

The effect of roll yield - Chicago Wheat

The effect of roll yield - Arabica Coffee

Index Proxy

Index Proxy vs BCOM

Index Proxy - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.09
Sortino Ratio 0.13
Omega Ratio 0.13
Skewness -0.53
Kurtosis 3.03
Risk Statistics
Annualized Std.Deviation 13.08
Maximum Drawdown 57.29
Month to Recover 134.00
Worst Month -20.78
Losing Months (%) 46.20
Average Losing Month -2.84
Loss Deviation 2.76
Return Statistics
Last Month -0.77
Year To Date 3.40
3 Month ROR -1.08
12 Month ROR -5.58
36 Month ROR -3.22
Total Return 41.15
Compound ROR 1.22
Best Month 12.64
Winning Months (%) 53.80

Index Proxy - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 12.64 21.98 32.33 40.84 67.44 87.54 144.48
Worst -20.78 -34.36 -45.42 -45.36 -39.97 -43.18 -48.08
Average 0.17 0.56 1.28 2.71 5.89 8.75 16.81
Median 0.26 0.70 2.57 2.51 2.94 3.44 8.96
Last -0.77 -1.08 -1.91 -5.58 -4.16 -3.22 -33.33
Winning (%) 53.80 56.18 59.94 58.01 56.11 54.07 62.54
Avg. Pos. Period 2.76 5.15 8.02 13.55 23.18 29.86 40.47
Avg. Neg. Period -2.84 -5.32 -8.81 -12.27 -16.22 -16.10 -22.71
# Of Periods 342.00 340.00 337.00 331.00 319.00 307.00 283.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-57.29 134 NA 2008-07-31 NA
-36.93 77 56 1997-06-30 2003-10-31
-9.54 14 12 2006-08-31 2007-09-28
-8.10 31 16 1991-11-29 1994-05-31
-6.02 4 3 2008-03-31 2008-06-30

Index Proxy Performance Attribution - WTI Crude Oil

Index Proxy Performance Attribution - Arabic Coffee

Index Proxy Performance Attribution - Corn

Curve Shape and Annualised Return

Long Backwardated Commodities

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

Long Backwardated Commodities - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.48
Sortino Ratio 0.72
Omega Ratio 0.57
Skewness 0.51
Kurtosis 4.74
Risk Statistics
Annualized Std.Deviation 8.72
Maximum Drawdown 20.20
Month to Recover 100.00
Worst Month -10.50
Losing Months (%) 47.08
Average Losing Month -1.39
Loss Deviation 1.69
Return Statistics
Last Month 0.07
Year To Date -3.61
3 Month ROR -3.43
12 Month ROR -5.86
36 Month ROR -2.96
Total Return 223.44
Compound ROR 4.20
Best Month 13.93
Winning Months (%) 51.75

Long Backwardated Commodities - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 13.93 18.75 25.14 42.06 57.59 73.49 121.12
Worst -10.50 -15.53 -16.51 -17.10 -16.34 -14.78 -17.76
Average 0.38 1.13 2.35 5.00 10.94 17.33 34.24
Median 0.04 0.56 1.23 2.54 4.90 12.46 28.58
Last 0.07 -3.43 -3.34 -5.86 -1.63 -2.96 -14.04
Winning (%) 51.75 56.76 60.24 60.42 66.77 73.94 80.92
Avg. Pos. Period 1.99 3.93 6.38 11.59 19.11 25.17 44.21
Avg. Neg. Period -1.39 -2.55 -3.75 -5.05 -5.49 -4.91 -8.07
# Of Periods 342.00 340.00 337.00 331.00 319.00 307.00 283.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-20.20 100 NA 2011-05-31 NA
-17.60 27 12 2000-12-29 2003-02-28
-16.80 34 26 2008-07-31 2011-04-29
-16.75 33 11 1997-06-30 2000-02-29
-9.12 50 26 1991-11-29 1995-12-29

Short Contango Commodities

Short Contango Commodities - Equity Curve

Short Contango Commodities - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.12
Sortino Ratio 0.19
Omega Ratio 0.16
Skewness 0.91
Kurtosis 5.54
Risk Statistics
Annualized Std.Deviation 12.38
Maximum Drawdown 41.95
Month to Recover 85.00
Worst Month -12.25
Losing Months (%) 49.42
Average Losing Month -2.31
Loss Deviation 2.19
Return Statistics
Last Month -0.70
Year To Date -9.84
3 Month ROR -4.80
12 Month ROR -2.18
36 Month ROR -3.85
Total Return 49.85
Compound ROR 1.43
Best Month 22.36
Winning Months (%) 50.58

Short Contango Commodities - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 22.36 44.63 62.51 72.54 63.91 67.30 76.54
Worst -12.25 -17.07 -18.41 -22.06 -31.63 -32.03 -31.85
Average 0.18 0.58 1.29 2.64 5.00 7.67 13.22
Median 0.03 -0.15 -0.72 -0.81 0.06 2.16 9.64
Last -0.70 -4.80 -4.56 -2.18 1.08 -3.85 34.03
Winning (%) 50.58 48.82 45.40 45.62 50.16 55.05 62.54
Avg. Pos. Period 2.61 5.19 9.21 14.37 19.64 22.99 29.97
Avg. Neg. Period -2.31 -3.81 -5.30 -7.20 -9.73 -11.10 -14.74
# Of Periods 342.00 340.00 337.00 331.00 319.00 307.00 283.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-41.95 85 12 2002-02-28 2009-02-27
-35.56 81 51 2009-03-31 2015-11-30
-18.40 42 NA 2016-03-31 NA
-17.64 30 19 1999-03-31 2001-08-31
-14.77 79 49 1992-01-31 1998-07-31

Combination Portfolio

Basic Idea

Here we combine the two ideas

  • Take long exposure in backwardated commodities
  • Take short exposure in contango commodities
  • Keep the BCOM Index weights

Combination Portfolio - Equity Curve

Combination Portfolio - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.46
Sortino Ratio 0.80
Omega Ratio 0.51
Skewness 0.77
Kurtosis 3.92
Risk Statistics
Annualized Std.Deviation 13.27
Maximum Drawdown 27.72
Month to Recover 77.00
Worst Month -10.65
Losing Months (%) 43.57
Average Losing Month -2.53
Loss Deviation 2.19
Return Statistics
Last Month -1.58
Year To Date -14.27
3 Month ROR -9.22
12 Month ROR -8.76
36 Month ROR -7.22
Total Return 436.09
Compound ROR 6.07
Best Month 22.36
Winning Months (%) 56.43

Combination Portfolio - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 22.36 41.81 56.36 65.80 68.23 94.43 144.49
Worst -10.65 -13.79 -17.99 -18.51 -19.88 -24.06 -19.80
Average 0.56 1.73 3.56 7.42 15.90 26.06 50.39
Median 0.33 0.99 1.82 4.67 15.75 24.46 43.23
Last -1.58 -9.22 -8.87 -8.76 -1.24 -7.22 16.02
Winning (%) 56.43 56.76 60.53 65.86 77.12 82.41 93.99
Avg. Pos. Period 2.95 6.07 9.06 14.34 23.43 33.73 54.20
Avg. Neg. Period -2.53 -3.98 -4.87 -5.92 -9.48 -9.85 -9.16
# Of Periods 342.00 340.00 337.00 331.00 319.00 307.00 283.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-27.72 77 32 2009-03-31 2015-07-31
-20.50 44 NA 2016-01-29 NA
-20.31 56 25 1991-11-29 1996-06-28
-14.98 24 13 2002-01-31 2003-12-31
-11.56 14 12 2006-10-31 2007-11-30

Trend System on BCOM Commodities

Basic Idea

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

Trend System on BCOM Commodities - Equity Curve

Trend System on BCOM 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 BCOM 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 1.25
Sortino Ratio 2.51
Omega Ratio 1.48
Skewness 0.17
Kurtosis 0.17
Risk Statistics
Annualized Std.Deviation 9.59
Maximum Drawdown 7.81
Month to Recover 10.00
Worst Month -5.31
Losing Months (%) 36.46
Average Losing Month -1.83
Loss Deviation 1.38
Return Statistics
Last Month -3.01
Year To Date 4.43
3 Month ROR 4.61
12 Month ROR 10.65
36 Month ROR 18.99
Total Return 147.97
Compound ROR 12.02
Best Month 8.36
Winning Months (%) 63.54

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 24.90 44.81 63.59 72.43 109.77
Worst -5.31 -6.14 -6.11 -2.61 -2.90 9.58 62.27
Average 0.99 3.03 6.06 12.12 26.17 43.34 79.41
Median 0.86 2.59 4.83 9.71 22.53 47.51 76.16
Last -3.01 4.61 4.43 10.65 22.18 18.99 67.34
Winning (%) 63.54 76.60 85.71 92.94 98.63 100.00 100.00
Avg. Pos. Period 2.60 4.75 7.58 13.13 26.57 43.34 79.41
Avg. Neg. Period -1.83 -2.60 -3.04 -1.14 -2.90 NaN NaN
# Of Periods 96.00 94.00 91.00 85.00 73.00 61.00 37.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-7.81 10 2 2016-10-31 2017-07-31
-6.14 5 2 2014-01-31 2014-05-31
-5.79 7 3 2015-12-31 2016-06-30
-5.31 4 3 2013-01-31 2013-04-30
-5.12 3 2 2013-08-31 2013-10-31

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 64.00 59.00 35.00
mean 3.85 3.26 4.58
std 2.96 2.61 4.02
min 0.23 0.04 0.15
25% 1.61 1.41 1.61
50% 3.37 2.54 2.94
75% 5.71 4.76 7.11
max 11.77 9.61 14.74
number of months 107.00 107.00 58.00
Positve Percentage 59.81 55.14 60.34
Equilibrium Weight 38.50 35.50 26.00

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