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 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.

Spread Portfolio:

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

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.

• 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.