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1/ Comparing First, Second and Third Generation Commodity Indices (Miffre)

For a short common sample period, long/short third-generation commodity indices outperform long-only second-generation versions, which outperform first-generation passive indices.

papers.ssrn.com/sol3/papers.cf…
2/ For a period common to all 38 indices the authors consider, the first-generation long-only, full-collaterallized, passive indices have negative returns.

The period contains the 2008-9 financial crisis, which accounts for both the negative returns and the negative skewness.
3/ The second-generation indices, which use various strategies to minimize the impact of contango in a long-only context, outperform the first-generation indices.

The difference in skewness is driven mainly by the first-generation DCI index (and goes away if DCI is removed).
4/ The third generation long/short indices outperform the second-generation indices with respect to raw returns, Sharpe ratios, skewness, and kurtosis.

(Some of the improved L/S performance may have come from the diversifying power of the momentum and fundamental strategies.)
5/ L/S outperformance held up in October of 2008 as well.

To avoid backfilling bias, the authors used only live data to evaluate the indices, but this means that the strategies were compared within a window of only four years.
6/ Related research:

Exploiting Commodity Momentum Along the Futures Curves


Commodity Futures Risk Premium: 1871–2018


Strategic Allocation to Commodity Factor Premiums
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Darren
@ReformedTrader
“The middle class is shrinking, but not due to falling into poverty. Rather more people are ascending into higher income brackets.

“In 2018, the share of households earning less than $50,000 (the lower class) dropped below 40% for the first time."

cato.org/blog/middle-cl…
Jordà, Knoll, Kuvshinov, Schularick, and Taylor have an interesting argument regarding inequality here. (Investment returns are normally higher than GDP growth except during world wars.)

The results of this poll are also interesting:
Read 3 tweets
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Darren
@ReformedTrader
1/ Carry Trade and Systemic Risk: Why are FX Options so Cheap? (Caballero, Doyle)

"VIX rolldown performs at least as well as carry.

"However, hedging carry with exchange rate options produces large returns that are not a compensation for systemic risk."

papers.ssrn.com/sol3/papers.cf…
2/ Realized returns for currency carry vs. returns required based on its β (in this case, β exposure to VIX futures rolldown)

Hedged with 1-month, ATM exchange rate options back-calculated from IV data

Note: The authors don't explain why this works or whether it will continue.
3/ Colm O'Shea implemented a similar strategy in real time in 2006-7.

In his interview with Jack Schwager, he notes that implied volatility was too low during that period (and suggests that carry hedged with options may not always work).

Read 13 tweets
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Darren
@ReformedTrader
1/ Exploiting Commodity Momentum Along the Futures Curves (De Groot, Karstanje, Zhou)

"Momentum strategies that invest in contracts on the futures curve with the largest expected roll-yield or the strongest momentum earn higher risk-adjusted returns."

papers.ssrn.com/sol3/papers.cf…
2/ Consistent with Rallis, Miffre, Fuertes (), longer-maturity contracts have higher returns, are less volatile, and are less liquid.

Contracts are fully collateralized (and, later in the paper, will be equally weighted). Returns include T-bill yields.
3/ Roll yields are calculated between the contract to be traded and the adjacent contract with one month less time.

100% turnover = L/S portfolio completely changed once a year

Assumed trading costs >> than the 3.3 bps assumed in other studies.

All three strategies add value.
Read 9 tweets

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