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CMPT


Total Posts: 44
Joined: May 2006
 
Posted: 2016-12-14 15:27
I would like to ask the forum a question about "level" versus "change" in systematic trading strategies (I don't have a background in time-series analysis so please excuse me if this question is simple-minded):

Assume a monthly-rebalanced commodity carry strategy in which any single commodity's weight in the portfolio weight is the rank of its basis - e.g. log of the ratio of unadjusted nearby future price and unadjusted 12-month-forward futures price - scaled and shifted such that the lowest ranked commodity has a weight of -1 and top ranked a weight of 1. Assume we call this the "commodity carry" strategy.

Suppose this strategy is tweaked to rank the monthly change in basis of the commodities.

We notice the two strategies have worked in the past but had a fairly low correlation of only ~0.3.

Questions:

1) Given we call the first strategy "commodity carry", what should we call the second strategy?
2) How should we think about the difference between the strategies (i.e. is the low correlation meaningful? Would we expect to see similar correlation when applying the above to other asset classes)?

Thanks everyone!

EspressoLover


Total Posts: 221
Joined: Jan 2015
 
Posted: 2016-12-14 19:53
Sounds like the second strategy is just a proxy for trend. The back month futures almost always has smaller beta to spot price or curve average than the front month. So if carry has increased over the past month, it's most likely because prices are rising, with the front months rising faster than back months.

Trend is usually considered a separate factor to carry, and historically correlations are quite low.

CMPT


Total Posts: 44
Joined: May 2006
 
Posted: 2016-12-14 20:56
Yes, I agree price trend and the second strategy seem to share "trend" in common. But the "trend of carry" of the second strategy performs better than price trend and plain carry combined (I can share the details). So would it be fair to give "trend of carry" its own category/name, even if just "trend of carry"?

CMPT


Total Posts: 44
Joined: May 2006
 
Posted: 2016-12-14 21:00
i.e. is there a more accurate/better name than "trend of carry"

ronin


Total Posts: 201
Joined: May 2006
 
Posted: 2016-12-15 16:48
Like @el says, it is just trend.

The reason why "front month up, 12m down" looks like it works better than just "front month up" is because the roll is cheaper when the curve is flatter. It is still trend following.


"People say nothing's impossible, but I do nothing every day" --Winnie The Pooh
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