- 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 ±2SD, where SD is the running standard deviation of the allocations, and then normalized to ±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 (𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐼𝑛𝑑𝑒𝑥) = 0.36
𝑆𝑅 (𝑂𝑣𝑒𝑟𝑙𝑎𝑦 𝑆𝑡𝑟𝑎𝑡𝑒𝑔𝑦) = 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.