Standard Index Overlay Strategy



  • Standard commodities indices, which are based on fixed allocations to a basket of commodities, are popular and easily tradeable.
  • Can we produce an overlay strategy for the standard indices?


  • The AiLA strategies are typically based on allocation decisions associated with individual assets, such as the March Corn or December WTI contracts.
  • The individual asset allocations are aggregated to form a commodity level allocation.
  • The commodity allocations are combined according to the standard index weights to obtain the overlay strategy allocations for the standard index as a whole.

Aggregation at Commodity Level

  • All the individual assets like March Corn, May Corn etc. are considered for all the commodities that form the standard commodity index.
  • The AiLA models generate the allocation decisions for all the individual assets.
  • Based on a recent study on the structures of the individual asset allocations[1], a balanced set of individual assets are used as they provide hedging benefits and therefore better risk adjusted performance.
  • The allocation decisions of these individual balanced assets are combined at the commodity level based on the majority vote.
  • The individual commodity weights used by the standard index are further used to calculate the overlay strategy allocations.
  • Figure 4 shows that the top 5 commodities in terms of their daily weights, which belong to the Oil and Gas sector, are given an average weight of 60% in the standard index calculation.

[1] Hedging Benefits from Individual Assets -

Overlay Strategy Allocation

  • The overlay strategy allocations is obtained by taking the weighted average of the daily commodities allocations based on the weights of these commodities in the standard index.
  • The obtained overlay strategy allocations are winsorized at Β±2SD, where SD is the running standard deviation of the allocations, and then normalized to Β±100% (shown in Figure 2).
  • Based on the risk-adjusted performances compared in Figure 5, the overlay strategy on the standard index performs significantly better than the standard index alone with the Sharpe Ratios

    𝑆𝑅 (π‘†π‘‘π‘Žπ‘›π‘‘π‘Žπ‘Ÿπ‘‘ 𝐼𝑛𝑑𝑒π‘₯) = 0.36

    𝑆𝑅 (π‘‚π‘£π‘’π‘Ÿπ‘™π‘Žπ‘¦ π‘†π‘‘π‘Ÿπ‘Žπ‘‘π‘’π‘”π‘¦) = 1.94

  • As Oil and Gas sectors are allocated 60% in the standard commodity index, the performance of the overlay strategy is also shown when based only on the Oil and Gas commodities allocations, as well as when excluding them.
  • The ability to take long and short positions in the standard index helps the overlay strategy with obtaining the better performance than the long-only position in the standard index.


  • The individual asset allocation decisions for a balanced set of assets are aggregated based on majority vote to obtain the commodity level allocation decisions.
  • The commodity level allocation decisions are weighted according to the standard index weights to obtain the overlay strategy allocation.
  • The risk adjusted overlay strategy performance appears significantly better than the long-only standard index performance and the historical performance can be attributed to the following factors.
    • The individual AiLA allocation models that run at the ground level extracting the optimal performance out of any asset.
    • The balanced asset selection process which results in the low correlation between the individual asset allocation and thus provides hedging benefit and better risk adjusted performance.
    • The ability to identify the market regimes and to appropriately take both long and short positions on the standard index.