The column on the right shows the corresponding return of internally created and calculated custom indices, depending on your selection either for oil or oil stocks.
Select time periods/market events for oil or oil stocks. To see all data, click the first or the second box for oil and oil stocks, respectively.
Also, you can apply the signals for oil or oil stocks on your time series. The corresponding risk and return figures are shown.
Oil (energy in general) is the most important commodity/input for products and services. As such, its supply has tremendous effects on prices, inflation, and the valuation of assets.
For our consulting business, e.g. analytics of funds/ETFs or strategies, at least implicitly, energy prices are often one of the main factors in models to evaluate strategy philosophy and scenarios.
Commodities are a vital part in non-traditional segments of strategic asset allocations (SAA).
In an persisting low interest environment, active strategies as satellites or within TAA are more and more seen as necessary alternatives to pure beta exposure and/or as part of the shift into alternative investment sources of return.
The oil strategy delivers the three signals long, short, and neutral. Either positions in a given asset allocation can be established or a distinct active strategy implements the signals.
Hedging Beta Exposure
Existing beta exposure to oil or oil stocks can be hedged based on the signals. The implementation as a weighting scheme is a closely related use case.
The model is based on a top down view on asset allocation flows and probably best described as “behavior-driven”. It can serve as a diversification to strategies that rely on fundamentals, on technical indicators or are higher frequency models, e.g. of commodity experts.
Related Topics
Global macro opportunities can be spotted for topics that are related to the price of oil.
For determining the direction of the price of oil it would be optimal to know all supply and demand parameters, know the elasticity of demand and supply as well as the motivation (current allocation) of the potential buyers and sellers, the expected supply and demand parameters. This data and the resulting information is not available (to us). Therefore, we make use of proxies from which we can derive the behavior of market participants and conclude effects on the direction of oil.
The model does not aim to forecast oil price ranges, let alone target prices.
The model looks at four market players. A multi factor framework incorporates asset prices and asset flows that are assigned to these players. No single factor/factor group can solely determine the model’s signal. A high conviction setup is required for a signal
2) Consumers: Corporates, countries and derivatives producers need to hedge their exposure to oil prices.
4) Asset Allocators: Investors shift or just rebalance their allocations triggered through common allocation and/or risk models.
- Fully systematic, rules based
- Robust: no change in parameters since start date of historical and live simulation
- Low frequency: weekly or daily signals
- Independent from specific data sources: all input information is publicly available
- News and events (e.g. OPEC meetings) completely ignored
- No trend follower, no machine learning, no AI, no black box
- Asymmetric return contribution: short exposure contributes most (historical outcome)
- Open for further development and improvements
The strategy can be directly applied to oil futures, exchange traded products or other derivatives of oil (spot) prices, e.g. WTI, Brent.
Model Input and Diversification
The strategy’s signals can be utilized as a second opinion or a new input factor for an existing model on oil (energy or macro), serve as diversification (e.g. weight increasing/decreasing) to a mix of fundamental, technical, lower and higher frequency strategies on oil.
The signals can also be applied to time exposure to energy and energy related stocks / stock baskets. A slightly adjusted version takes equity asset class specifics into account (see simulation above). The short and neutral signals can be implemented to (partly) hedge exposure to energy stocks.
Corporates: Cut Input Costs
Improve your oil/energy procurement strategy and lower input costs.
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Phone: +49 (0) 6431 2842475, Email: info@qap-analytics.com
Company Website: www.qap-analytics.com
Managing Partner: Christian Schuster, CAIA
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