Commodity index documentation
The Macquarie Bespoke Volatility-Targeted Alpha/Beta Basket Index (MQCP430F) provides a dynamically weighted exposure to 22 Single Commodity Indices across 5 sectors (energy, industrial metals, precious metals, grains, and softs) and 13 Commodity Risk Premia Indices across 5 factors (Congestion, Curve Carry, Trend, Backwardation, and Value).
The congestion factor aims to earn positive returns by rolling ahead of the congested benchmark roll window. The most commonly traded commodity indices roll their contracts during five days starting on the 5th business day of the month and ending on the 9th business day of the month. As a result, during this period there is a substantial amount of similar trading activity, or congestion, when rolling from a nearby (or ‘front-month’) commodity futures contract to a contract with a later expiration. This can cause price pressure in the contracts such indices are exposed to. Trading (i.e. rolling) away from this standard roll period, to avoid this price pressure, is the optimization principle behind the congestion strategy.
The curve carry factor aims to capitalize on the differential in roll yields at the front versus the back of the futures curve, with front contracts typically incurring more negative roll yields. This differential can be explained by differentials in long term vs short term storage costs, with short-term storage typically being more expensive than long-term storage. Another driver of the premium is the need for producers to compensate financial speculators with higher expected excess returns for contracts that are further out on the futures curve with reduced liquidity. If the shape of the futures curve remains unchanged, the strategy aims to generate a positive return through the difference in roll yields between the contracts on which long and short exposures are taken.
The trend factor aims to take long exposure to assets that have performed positively over the recent past and take short exposure to assets that have performed negatively over the recent past with the expectation that the prior observed performance may continue to propagate into the future.
The backwardation factor aims to capitalize on the roll yield differentials observed across the commodity markets by taking (i) long exposure to backwardated commodities and (ii) short exposure to contangoed commodities. Backwardation is the market condition where prices of futures contracts nearer to expiry (front of the futures curve) are higher than prices of futures contracts further from expiry (back of the futures curve). This can be caused by a number of factors depending on the asset class. In commodities, the shape of the futures curve is mainly affected by supply and demand conditions of the underlying commodity, with commodities where demand outpaces supply generally being in “backwardation” and those commodities which are oversupplied generally being in “contango” (the opposite of backwardation, with higher futures prices in the back of the futures curve than the front). If the shape of the futures curve stays the same, the strategy profits from the higher roll yields on the long exposure versus lower roll yields on the short exposure.
The value factor aims to capture the long-term mean reversion in commodity spot prices within the commodity cycle, where high commodity spot prices encourage investment into supply expansion that ultimately tends to lead to lower spot prices due to over-supply and consequently, subsequent underinvestment and supply reduction. The strategy aims to capture this long-term mean reversion by taking long exposure to commodities that are deemed undervalued and short exposure to commodities that are deemed overvalued.
The Index includes a volatility-targeting overlay that dynamically adjusts the exposure to target a 5% realised volatility.
To ensure that the Index is replicable, the Index includes deductions for estimated costs of trading the ultimate constituents of the Index. The actual cost (where applicable) of changing the exposure of the Index to the constituents may be lower or higher than the estimated costs deducted from the Index Level.
Investors in this Index should read the Index Manual and each Component Methodology.
