Big Systems vs. Small Ag Traders
Given the value of fundamental information in trading physical commodities, let’s compare the Barclay BTOP50 Index and the Barclay Agricultural Traders Index versus the same period (see “BTOP vs. Ags,” above). Neither index has specific parameters for style, but the BTOP50 is composed of the 20 largest Commodity Trading Advisors (CTAs) by AUM (two-thirds are systematic diversified trend followers). The bulk of the 38 programs currently in the Barclay Agricultural Traders Index are discretionary fundamental traders.
The spread of the returns is greater than the Systematic and Discretionary Indexes but still minimal. The BTOP50 Index returns are somewhat greater with very similar volatility levels resulting in slightly better risk-adjusted returns. The kurtosis and skew statistics for the BTOP50 indicate moderately fats tail with the moderate propensity to surprise with positive returns. The same for the Agricultural Traders Index indicate very fat tails with a high propensity for positive surprises.
The correlation between the two indexes is 0.23. The 50/50 combination of the two resulted in the return falling in between the two but with the risk-adjusted return significantly higher. The possibility for positive tail events fell much closer to the Ag Index, so a strong possibility of positive returns exists.
After reviewing the drawdown data from the BTOP50 and Ag index (see “Big vs. small,” above), one can see that the drawdowns of the Agricultural Index are longer than the BTOP50 and moderately deeper as well. Run-ups are also greater and of slightly longer duration. The 50/50 portfolio significantly reduced drawdown depth and duration relative to the two individual indexes.
What is interesting is that the risk metrics are dramatically improved by combining these two indexes. This likely due to the lower correlation as not all of the components of the BTOP50 trade ag markets, and those that do trade them from a systematic technical perspective as opposed to the vast majority of programs in the Ag index, which trade from a fundamental discretionary perspective.
In the second part of this series we will look at the Société General indexes and analyze what we have learned from all of the data.