- The described approach, using a cos(𝛼) constrain for the AiLA long/short index weights, result in desired correlation to GSCI.
- The unconstrained AiLA long/short index show slight negative correlation (-14%) to GSCI, which increase with tighter constraints and saturates inline with suggested maximum (<86%).
- Given the long-only nature of an index like GSCI the constrained AiLA index effectively converge towards a pure long signal index, concentrated to the main GSCI risk groups, with an increasingly positive correlation constraint.
- However, these results are produced in a context where asset capacity constraints are not relevant.
- In case of tight capacity constraints, the AiLA index will be concentrated to certain high liquidity assets, which both affect the ability to control correlation as well as the performance.
(* Given the positive correlation preference studied here, in the rare cases where the constraint cannot be met, the method defaults to only using any available long signals.)