The STAY-C Fund has three goals. It aims to participate in the upside of commodity bull markets, generate some return in sideways markets, and preserve capital in bear markets. These aims have been attained.The strategy has delivered 81.4% since May 2007, outperforming a wide spectrum of both traditional and enhanced commodity index products: the Dow Jones UBS Commodity Index, the S&P GSCI Index, the DB Platinum Commodity Index, the JB Commodity, and the DWS Invest Commodity Plus, have all been negative over the same period. The most striking outperformance was seen in 2008, when the STAY-C strategy made 26.8% and other indices incurred deep losses.The STAY-C Commodity index, with ticker A0MENU on Bloomberg, has been calculated by Deutsche Boerse since 04/05/07. The German stock exchange was chosen as it has an excellent reputation for index calculation.
STAY-C has outperformed indices by picking the right commodity markets, and by sometimes moving partly or wholly into cash. In 2006, for instance, the strategy owned the best performing 5 commodities 56.2% of the time, and was exposed to the worst performing 5 commodities only 11.6% of the time. The low correlations among commodity markets mean the rewards from selecting the right markets are bigger than in other, more correlated, markets. But sometimes none of the commodity markets look promising, and then the best course of action is to stand aside. If we backtrack to 2008, the strategy was entirely in cash for much of the year.
Whereas some commodity indices can have as much as 75% energy exposure, STAY-C caps individual commodities at 20%, and has averaged just 18.7% in the energy complex. The markets identified as being most promising are equally weighted. Selections are rebalanced weekly.
Mathematical algorithms lie behind the selection of markets. The approach is completely rules-driven to remove human emotion from the equation. Stay-C co-founder Dimitri Speck studied electrical engineering, and in his scientific career he devised algorithms for the iterative totalisator market, and to precisely map seasonal patterns. These analytical techniques have now been applied to the financial markets. The Stay-C fund looks for patterns in price behavior, and digs deeper than traditional signals such as moving averages. Additionally, STAY-Clikes to see an intuitive explanation for factors to avoid the risk of coincidental correlations that are not repeatable.The systems also consider whether future commodity prices are higher or lower than current prices. When future prices are lower, the market is said to be in backwardation, which results in a positive “roll yield” when contracts are rolled from one month to the next. This phenomenon helps STAY-C to extract some positive returns even in a sideways market. In fact a down market could even be consistent with positive returns, if the downtrend was smaller than the cumulative roll yield. Historically, the strategy has owned backwardated commodity markets twice as often as it owned markets in contango.
The research process has back-tested the algorithms using data going back to the 1970s. The 30 year period was chosen to increase the statistical significance of results. Data of some 7,000 futures contracts has been cleaned using both automatic and manual techniques. The 7 year Out Of Sample test results were consistent with the In Sample analysis.
STAY-C has a broadly positive long term outlook for commodity markets, expecting returns as good as from equities. STAY-C also points out that commodities add valuable diversification benefits to portfolios, and cautions investors that upside from bonds is limited with bond yields so low. STAY-C aims to outperform the broad indices through market selection, which worked well last year. STAY-C produced a return of 8.9% while some commodity indices were down.
Staedel Hanseatic was founded in 2005, and has offices in Riga, Frankfurt and Luxembourg. Both partners have been widely published. Dimitri Speck has written a book on gold politics and Felix Pieplow writes for German newspaper Handelsblatt.