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Hi everyone!
Commodities are sometimes used as hedges for Equities or other commodities. It makes sense in scopes of macroeconomics. Increases in crude oil prices increase operational costs for enterprises and increase living costs for households, which decrease overall demand and decrease stock prices. Furthermore, some commodities, like precious metals, are used as sources to fight interest rate changes. These negative- and zero-correlations might lay the basis of an efficient portfolio, according to modern portfolio theory.
In this strategy, we monitor a universe of 12 Futures. At the start of each week, we select the 5 continuous Futures contracts with the lowest volatility in their trailing 30-day returns. We then form a portfolio that's weighted by the inverse volatility of each Future.
The strategy achieved a 10.78 Sharpe ratio. However, the annual standard deviation was 0.901, so does the strategy need some risk management control like deleveraging? Let us know what you think in the comments below!
Best,
Derek Melchin
.ekz.
Interesting strategy, albeit with extreme leverage.
What's the most practical way to deleverage this?
Shaun Dawson
I ran it on 2020 (-17.65%) and 2022 (-36.2%), and it gets killed both years. I've attached 2022 to illustrate. It seems pretty dominated by a small number of good/bad days.
Jens.
Hi,
To deleverage a futures strategy you can a) use a bigger portfolio and a smaller relative target or b) pick smaller futures contract. Due to the contract multipliers, the smallest corn contract you selected costs around 50.000 $ depending not the history
I deleveraged your backtest since the smaller contracts have less history. So for me it is backtesting like a millionaire and for live trading substituting the contracts to the smallest liquid enough size for live trading (once I get to the point).
(you find my changes searching for “Jens”)
Hope that helps
Jens
Derek Melchin
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