Futures curve based alpha strategy In an Merrill Lynch commodity report

Discussion in 'Strategy Building' started by mizhael, Feb 15, 2011.

  1. What products from other banks? Could you please give some pointers? I can take a look and keep you guys updated...
     
    #11     Feb 17, 2011
  2. Ok, the first step might be to identify all futures you want to trade and when they are scheduled to roll.

    If you have coverage at MS, I would also ask them, I'm sure they've done some work in this area.
     
    #12     Feb 18, 2011
  3. Barclays, for one. ... Now could you actually <i>contribute</i> to the discussion -- some of the 'research' and 'updates' you're forever telling us you'll share? Would be a nice break from the constant stream of queries and requests.
     
    #13     Feb 18, 2011
  4. I haven't seen this report, but you could "dig in" to the data in order to try and replicate the strategy. It's not a tough concept, if you think about it intuitively.

    Here are your steps:
    1) aggregate forward vectors for various commodities
    2) "fit" vectors, or interpolate if you've only got a few contracts
    3) note the steepness(invertedness) of these fitted/'terp'd vectors
    4) test the impacts on various markets during times of extreme (you define a thresholding parameter) steepness, inversion, or flatness all at various lead/lag lengths
    5) create a strategy based off of your results, and avoid overfitting

    Have Fun
     
    #14     Feb 20, 2011
  5. It means their customers (smart money) are expecting high volatility and possibly a drop in commodities. The alpha startegy tries to remove beta by long/short allocation and to capture alpha, usually excess retuns over some index like S&P 500, based on complicated backtest results using proprietary indices. The allocation usually takes place monthly with daily controls for excess volatility above a certain level. See this index for example:

    https://index.db.com/dbiqweb2/index/db_Commodity_Harvest_10

    These startegies are used when customers do not want straight beta exposure to a market.

    It may also be an indication some expect a double dip and another dollar rally with commodities falling.
     
    #15     Feb 21, 2011
  6. True enough, but as they say, "securities are sold, not bought." The main driver is that the banks/brokers want to differentiate their commodity-index offerings -- add some special sauce -- so their salestraders have a better soundbite for institutional clients. You could say commodities have become commoditized -- all the banks offer products now.
     
    #16     Feb 24, 2011
  7. #17     Feb 24, 2011
  8. sle

    sle

    There is a number of "alpha" strategies that different banks offer, the best suite in the interest rate world probably comes from DB. In general, these strategies offer fairly simple "statistically probable" payoffs. E.g. stupid buy-write, straddle or strangle selling have already been covered and can be replicated. Lots of people used to want these as principal protected structured notes or CPPIs.
     
    #18     May 7, 2011