Univesal Alpha Factory Crafting Portable Excess Return By Investing In Liquid Commodity Futures Mitev

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Case Study Presentation at the European Alternative Investment Summit on 5th 7th November 2008 Fairmont Le Montruex Palace, Montreux, Switzerland

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  • 1. s Universal Alpha Factory: Crafting Portable Excess Return by Investing in Liquid Commodity Futures European Alternative Investment Summit a marcusevans summit series event 5-7 November 2008 | Fairmont Le Montreux Palace | Montreux | Switzerland
  • 2. s Disclaimer The views and opinions expressed in this presentation are those of the authors only, and do not necessarily represent the views and opinions of Siemens AG, or any of its employees. The authors make no representations or warranty, either expressed or implied, as to the accuracy or completeness of the information contained in this presentation, nor is he recommending that this presentation serves as the basis for any investment decision. This presentation is prepared for the European Alternative Investment summit on 5-7 November 2008 in Fairmont Le Montreux Palace, Montreux, Switzerland only. Research support from fin4cast is gratefully acknowledged. Dr. Miroslav Mitev - Siemens AG sterreich, Siemens IT Solutions and Services, Program and System Engineering, Fin4Cast, Gudrunstrasse 11, 1100 Vienna, Austria, Phone: +43 (0) 517 07 46253, Fax: +43 (0) 517 07 56256, email: info@fin4cast.com, www.fin4cast.com/indices. 11 08 2
  • 3. s Agenda Definition of Beta and Alpha Separating Alpha from Beta Inter-dependences between different asset classes Maximizing returns through commodity exposure Generating Alpha from long & short exposure to commodities using liquid futures Measuring the effect of porting Alpha to core investment Conclusion and Q&A 11 08 3
  • 4. s Definition of Beta In general Beta represents the market return (Risk Premium) of an asset class Depending on investors objectives the Beta could be defined as: the return of the stock market (DJ Industrial Average Index) the return of the bond market (U.S. Treasury Note) the return of the commodity market (DJ AIG Commodity Index) the return of the currency market (EUR/USD Exchange Rate) the return of investors liabilities (Liability Index = Zero Coupon Bonds) Depending on the way investors take exposure to Beta we could distinguish between: Traditional Beta, i.e. the long exposure through buy and hold of futures, ETFs, etc. Alternative Beta, i.e. the rotation between the traditional betas and taking advantage of short exposure (CS Tremont Hedge Fund Index) 11 08 4
  • 5. s Stock Market Beta 11 08 Source: Thomson Reuters 5
  • 6. s Bond Market Beta 11 08 Source: Thomson Reuters 6
  • 7. s Commodity Market Beta 11 08 7 Source: Thomson Reuters
  • 8. s Currency Market Beta 11 08 Source: Thomson Reuters 8
  • 9. s Alternative Beta 11 08 Source: Thomson Reuters 9
  • 10. s Definition of Alpha In general Alpha represents the excess return vs. a given benchmark Per definition Alpha can not be replaced or explained by the existing traditional and alternative Betas, i.e. it has a very low correlation to Beta Alpha can only be generated by taking active bets and is subject to managers skills, i.e. Know-How and technology Depending on investors objectives we can distinguish between: Relative Alpha, i.e. the relative out-performance against a given benchmark which is usually measured by the information ratio Absolute Alpha, i.e. the absolute excess return above a pre-defined threshold return usually measured by the Sharpe Ratio An example for a commodity Alpha prepared for this presentation is the fin4cast Commodity Index which benefits from long and short positions in 13 liquid commodity futures 11 08 10
  • 11. s Commodity Alpha 11 08 Source: fin4cast 11
  • 12. s Beta and Alpha Sources Source: Thomson Reuters 11 08 12
  • 13. s Separating Alpha from Beta Yt = + * X t + t Traditional beta: Stock Market Return Return Alpha = Skill = Residuals Market Risk Return of different Alternative Pure Asset Classes Return Residuals Alpha = Beta Traditional Beta Yt = + * At + * X t + t Alternative Beta: Yt = + 1 * X 1 t + 2 * X 2 t + 3 * X 3 t + 4 * X 4 t + L + k * X k t + t Commodity Bonds Stocks Currency Hedge Funds Commodity Alpha Risk Risk Risk Risk Risk 11 08 13
  • 14. s Interdependences between the asset classes (March 1999 Sep 2008) Rotated Matrix of the Principal Components a Components 1 2 3 DJIA .797 10 year US -.720 T-Note CS HFI .565 .518 EURUSD .831 DJ AIGCI .642 .374 FIN4CAST .952 Method: Principal Components Analyse. Rotation: Varimax with Kaiser-Normalisation. a. The rotation converged after 7 iterations. 11 08 Multi Correlation Coeffitien represents the average correlation to all other Betas and Alpha 14 Value Added Coeffitient = ABS (Sharpe Ratio/Multi-Correlation Coeffitien)
  • 15. s Interdependences between the asset classes (March 1999 March 2003) 11 08 15
  • 16. s Interdependences between the asset classes (April 2003 July 2007) 11 08 16
  • 17. s Agenda Interdependences between the asset classes (July 2007 September 2008) 11 08 17
  • 18. s Maximizing returns through commodity exposure Agenda 11 08 18
  • 19. s Generating Alpha from long/short commodity exposure Case study: fin4cast Commodity Index benefiting from the most liquid commodity futures across agriculture & live stock, metal and energy sectors by combining long and short futures positions. Eligible commodity futures: Agriculture & Live Stock: Metal: Energy: Corn (CBoT) Copper (COMEX) Natural Gas (NYMEX) Soybean (CBoT) Gold (COMEX) Light Sweet Crude Oil (NYMEX) Wheat (CBoT) Silver (COMEX) Coffee (NYBoT) Palladium (COMEX) Cotton (NYBoT Platinum (COMEX) Sugar (NYBoT) Lean Hog (CME) Live Cattle (CME) 11 08 19
  • 20. s Asset allocation as of 27th October 2008 11 08 20
  • 21. s Commodity long/short exposure YTD 2008 11 08 21
  • 22. s Performance attribution YTD 2008 (Agriculture) 11 08 22
  • 23. s Performance attribution YTD 2008 (Agriculture) 11 08 23
  • 24. s Performance attribution YTD 2008 (Live Stock) 11 08 24
  • 25. s Performance attribution YTD 2008 (Metals) 11 08 25
  • 26. s Performance attribution YTD 2008 (Metals) 11 08 26...