AiLA Products vs. AiLA Net Zero Products

Emission Strategy Study

  • As described in the AiLA methodology, the AiLA indices are characterized by a carbon footprint, calculated as a daily value based on the portfolio weights together with the capital allocated.
  • The footprint value represent the CO2 equivalent green-house-gas emissions in metric tons (MT) associated with the commodities underlying the portfolio assets.
  • Without implying what is a better/worse use case for such a footprint, there are different scenarios one could imagine where a footprint estimate could be included in an investment portfolio, e.g.
    • Hold an equivalent amount of CO2 emission rights as the portfolio footprint.
    • Restrict positions for certain commodities in order to reduce the portfolio footprint.
  • In this short analysis we investigate the impact on the AiLA product performance from the scenario where a long EUA futures position would have been maintained, to equal the portfolio footprint over time.
  • Given the significant rise of emission prices in recent years it is naively expected that a long position would improve the overall performance, however, the question we try to address here is also how much?

(* Note that in this document CO2 will be used in the sense of CO2 equivalent green-house-gas emissions)

AiLA + Long EUA

  • For simplicity, e.g. keeping the AiLA and EUA returns independent, we consider the scenario where for a given AiLA product an additional long emission allocation is made based on the AiLA carbon footprint.
  • The AiLA footprint is expressed as MT CO2 and the Emission allocation is represented by being long the front contract of the ICE EUA future, with the position being equal to the footprint each day.
  • The total %-return (𝑟 𝑇 ) of this AiLA+EUA strategy can then be expressed by the AiLA return (𝑟 𝐴 ) and the EUA return (𝑟 𝐸 ) using a factor based on the AiLA footprint in MT (𝐹𝑃 ), the EUA price (𝑝 𝐸 ) per MT and the allocated capital (A).
  • The factor 𝑓 𝐹𝑃 vary significantly over time due to the varying AiLA allocations, however, also due to the increasing emission price.
  • Even with the recent high emission prices the USD allocation to EUA tend to be a small fraction of the AiLA allocation.

(* The 2day lag originates from rebalancing at the same time as the AiLA product weights)

Performance Impact

  • As expected, the additional EUA allocation typically enhance recent historical performance.
  • On a risk adjusted basis the Sharpe ratio increase is typically about 10%, with some larger differences for individual cases when limiting the history to the most recent years.
  • There are, however, also cases where the Sharpe ratio is reduced.

Conclusions

  • The AiLA commodity product performance has been investigated in a short study when added together with a long EUA future allocation, equivalent to the corresponding AiLA carbon footprint.
  • The study does not make any claims about the validity of such an approach, but is motivated simply by the interest in how much such a scenario would impact the performance.
  • For the AiLA products the resulting EUA long allocation is generally found to be a smaller fraction of the capital allocated to the AiLA product.
  • However, partly due to the large EUA price volatility, this additional allocation often has a noticeable impact on the combined performance.
  • Over the history in this study the impact on the Sharpe ratio was typically about 10%, where the performance tend to have been enhanced, but also include cases where the Sharpe ratio was reduced.
  • This indicates that the under such conditions the performance impact for the AiLA products are relatively modest, but which does not have to be the case for other products, e.g. with larger / leveraged allocations.