The TVI® investment universe is limited to highly liquid, U.S. exchange-listed futures contracts.

Frequently Asked Questions


How were components within the Trader Vic Index® selected?

The TVI® universe is limited to highly liquid, U.S. exchange-listed futures contracts. As a result, components that do not exhibit sufficient liquidity or that trade outside the U.S. (most notably the London Metal Exchange metals) are not eligible for inclusion within the TVI® basket.

EAM has limited the investment universe to U.S. exchange-listed futures contracts mainly due to the fact that futures contracts have a daily settlement value whereas forwards contracts (like that of the LME metals) do not. The existence of a daily settlement price is essential for the purposes of obtaining accurate historical data and creating reliable pro-forma results.

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Describe the weighting scheme for the TVI®?

The TVI® is comprised of 24 futures contracts spread across Physical Commodities, Global Currencies and U.S. Treasuries. Assuming the Energy sector is positioned long, 50% of the TVI® is allocated to Physical Commodities; the remaining 50% is allocated to Financials (Global Currencies and U.S. Treasuries). The mix of the two asset classes tends to create internal diversification within the TVI® as our internal research has shown that the commodity side and financial side are not correlated over long-term periods.

The commodity portion of the TVI® is based on, but not exactly proportional to, historical production figures. As a result, the Energy sector (17.50%) receives the largest portion on the commodity side, which is logical. Energy, as measured by its production, is more significant to the global economy than Softs (3.00% when Energy is positioned long) and this is reflected in the weighting allocations. Physical commodities will represent 50% of the TVI® when Energy is positioned long and 39.39% when Energy is positioned flat.

On the financial side (Global Currencies and U.S. Treasuries), weightings are based on, but not directly proportional to, historical Gross Domestic Product (GDP) data. Therefore, the larger economic regions should get a higher weighting (i.e. Euro is 11% when Energy is positioned long, while the Aussie Dollar is 2.00% when Energy is positioned long). A key exception is the Swiss Franc, which receives a weighting of 10% when Energy is positioned long (clearly over-weighted and not reflective of GDP) due to its historical stability and liquidity. Financials will represent 50% of the TVI® when Energy is positioned long and 60.61% when Energy is positioned flat.

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Can the weightings of the TVI® change?

The TVI® will generally not adjust the weights of the sectors even though historical production and GDP change year-over-year. Production and GDP are used simply as general guides for the purposes of creating logical weighting schemes. However, the TVI®’s index committee reserves the right to change the weightings and other aspects of the index methodology under limited circumstances. For example, effective as of the market close of each index component on January 31, 2014, the TVI® reflects the reduction in the base weights of four commodity index components considered to be the least liquid (live cattle, lean hogs, and cocoa) by an aggregate of 1.5% reallocating such weights to the other commodity index components. All changes are reflected in the TVI®’s methodology paper available here.

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Why is the U.S. Dollar not included on the financial side?

Currencies are generally traded in pairs where a long position in one currency is a short position in the other half of the pair. For example, the TVI®’s Euro component is the EUR/USD pair. As such, a long Euro position implies a short USD position against the Euro while a short EUR position implies a long USD position against the Euro. Because this relationship exists with all of the TVI®’s currency components, the performance of the U.S. Dollar is already effectively included in the index.

Additionally, on the financials side, exposure to the United States is reflected via futures on U.S. Treasury Notes & Bonds, which aggregates to a weighting of 13.00% (when Energy is positioned long). We have scaled back the direct U.S. financial exposure in an effort to make the TVI® more diversified. The U.S. Treasuries at 13.00% (when Energy is positioned long) and Euro at 11.00% (when Energy is positioned long) is not intended to exactly reflect GDP since the U.S. would otherwise have a much larger allocation.

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What tenor are the U.S. Treasuries and why have they been chosen?

The TVI® trades futures contracts on 30-year U.S. Treasury Bonds and 10-year U.S. Treasury Notes. The longer durations have been chosen because they have historically exhibited more volatility than the shorter duration instruments. As the TVI® is a trend-following methodology that seeks to reflect price trends, the greater volatility of the longer dated notes & bonds is more conducive to reflect the profit potential inherent in price trends.

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Why are equities NOT INCLUDED in the TVI®?

The nature of the TVI® methodology is trend-following. As a result, we have limited the investment universe to asset classes that tend to be fundamentally cyclical. As a generalization, commodity prices move up and down because of supply and demand while the financials (Global Currencies and U.S. Treasuries) move up and down as a result of short-term rates. While exceptions exist, this is the conclusion resulting from our internal research.

Equities, conversely, are different and tend to behave in secular patterns for extended periods of time. As a result, the concept of trend-following does not work quite as efficiently (momentum is more appropriate for exposure to equities – this is explained later on). However, it was anticipated that exposure to the TVI® would be used within a larger portfolio, as an asset allocation, that included equity exposure.

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What positions can the TVI® take?

The TVI® establishes long or short positions once a month using a transparent, rules-based positioning process. All of the sectors within the TVI® are positioned either long or short at each month's end (except Energy, which is positioned long or flat/neutral).

Positions determinations are binary and either long or short. As an example, the Precious Metals sector has a weighting of 5.40% (when Energy is positioned long). Each month depending upon the signal generated from the trading model, Precious Metals will be positioned either 5.40% long or 5.40% short(each assuming Energy is positioned long). There is no relative strength screen or other adjustment applied in determining the monthly positions.

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Are positions taken on a sector or component level?

Long or short positions are always taken on a sector level (even though certain sectors consist of only a single component, as explained below).

The Financials (Global Currency and U.S. Treasuries) are sectors in and of themselves. As an example, the Euro sector (weight of 11.00% when Energy is positioned long) is simply the Euro component. Each month, the Euro will be positioned either 11.00% long or 11.00% short (each assuming energy is positioned long) depending upon the signal generated from the trading algorithm.

On the Commodities side, historically correlated components are grouped into sectors in an attempt to avoid false trading signals (whipsaws). This sectorization process tends to create a more consistent and robust return stream. As an example, Gold and Silver are typically correlated and grouped together to form the Precious Metals sector, which has a weighting of 5.40% when Energy is positioned long. Each month, the Precious Metals sector will be positioned either long or short depending upon the signal generated from the trading model. This means that both Gold and Silver will always have the same position; the index can never be positioned long Gold and short Silver.

There are two exceptions to the sector rule: 1.) Energy is either long or flat and 2.) the Softs sector can have independent positions (they act like the financials) due to the fact that there is no historical correlation between Cotton and Sugar. Within the Softs sector, it is possible to have 2 components positioned long and 2 components positioned short – this is not possible with any of the other sectors.

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Why is the Energy sector never positioned short?

The Energy sector (which now consists of Heating Oil, Light Crude and RBOB Gas) is subject to a unique “risk of ruin”. Energy markets tend to be controlled by cartels that have a great deal of influence over price and supply. Additionally, Energy is the engine of the global economy and therefore has a very significant importance (more so than Cotton, as an example). These factors, among others, provide for the potential for sharp, upward price movements.

Since the TVI® only takes monthly positions AND the sector weighting of Energy is the highest (17.50%) within the index, the TVI® will never take a short position in the Energy sector (which now consist of Heating Oil, Light Crude and RBOB Gas). In the event of a short signal (where the sector price closes below the Exponential Moving Average on the Position Determination Date), the Energy allocation will be liquidated and spread pro-rata to the remaining sectors. Essentially, each sector will gain a small increase in exposure, with that allocation coming from the Energy sector. As an example, the allocation to the Euro is 11.00% when Energy is positioned long and 13.33% when Energy is positioned flat.

Effective May 1, 2012, Natural Gas is no longer part of the Energy sector. Natural Gas as a separate sector may be positioned long or short in the TVI®, and such positioning is determined independently from the Energy sector. Unlike the TVI®’s Energy sector, the Natural Gas sector is exposed to the risk of being positioned “short” when an unexpected natural, sociopolitical or other event occurs that causes rapid increases in Natural Gas prices (or in energy prices generally).

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What tend to be the worst environments for the TVI® and trend-following strategies?

Both for the TVI® and trend-following strategies generally, range-bound price activity (i.e. “trading ranges”) OR short term reversals (i.e. “whipsaw” markets) are the most prevalent market conditions that tend to have a negative impact upon performance.

Said another way, sharp and sudden changes in price trends are normally a bad environment for the TVI® and other trend-following methodologies, as well as environments where the price trends are short in duration or extent.

In general, such market conditions are more likely to occur during economic environments of low-growth or static GDP despite very low interest rates, accompanied by low inflation. The “trading ranges” and “whipsaw” experienced by many markets since 2009 (with notable exceptions), along with abrupt changes prompted by government intervention and highly correlated markets, have been adverse to many trend-following indexes and methodologies. The length of time for which such market conditions have persisted is unique in the United States in the last 50 years. There can be no assurances as to such current market conditions will change.

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How does the rebalancing mechanism work in the TVI®?

The TVI® incorporates two levels of re-balancing: monthly sector rebalancing and annual component rebalancing.

Monthly Sector Rebalancing:
At the end of each month, the TVI® will rebalance the sector weights back to the weights as published in the TVI® methodology. As an example, Precious Metals has a sector weight of 5.40% (when Energy is long) and the sector will be rebalanced back to this weight at the end of each month. Therefore, Precious Metals will either be 5.40% long or 5.40% short (when Energy is long) at the end of each month (after the monthly rebalancing occurs). The process is the same for the TVI® when Energy is flat, with the weights simply changing due to the re-distribution of the Energy sector. Using Precious Metals as an example, the allocation at month-end when Energy is flat would be either 6.55% long or 6.55% short.

The monthly sector rebalancing of the TVI® is designed to limit volatility within the index as an extended move or overweight in a sector could create higher volatility. This is especially relevant within the commodity sectors, which historically have shown a higher degree of volatility. By rebalancing on a monthly basis, the TVI® maintains its target weights and aims to create diversification among the sectors and asset classes within the index. Importantly, the monthly rebalancing process provides potential for the TVI® to take profits each month from winning positions and re-distribute those profits among the other sectors. This process is valuable given the cyclical nature of the TVI® components.

Annual Component Rebalancing:
TVI® sectors are rebalanced at the end of each month to their target sector weights BUT the components of each sector are allowed to float throughout the course of the year. This process only applies to the commodity side since the financials are sectors in and of themselves. More specifically, this process applies to Energy, Grains, Livestock and Precious Metals. Softs, although grouped as a sector, can take independent positions and therefore act like the financials due to the fact that the 4 components of the Softs sector tend to exhibit little correlation to one another.

Taking Grains as an example, at the end of each month (assuming a long position in Energy), the sector will be positioned either 11.85% long or 11.85% short. At the beginning of the year, assuming Energy is positioned long, Grains will be comprised of Corn (4.10%), Soybeans (5.15%), and Wheat (2.60%). However, the component weights of the Grains sector are allowed to float throughout the course of the year but will always sum to a sector weight of 11.85% (assuming Energy is positioned long). This allows for a degree of macro economic influence and rewards components that have outperformed others. At the end of each calendar year, the TVI® will rebalance all of the components in the TVI® back to their weights as published in the methodology paper.

Roll Process:

Most sectors implement the rebalance (in other words, "roll") over a single day, which is the last business day of the month. Effective as of the market close of each index component on January 31, 2014, certain index components implement the rebalance over several days.

If a sector implements the rebalance over a single day, the individual components in that sector reset to their base weight (in other words, "roll") over a single day. Likewise, if a sector implements the rebalance over several days, the individual components in that sector reset to their base weight over the same number of days.

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How does the TVI® seek to capture roll yield (backwardation/contango)?

Roll yield (backwardation and contango) is intended to be a source of returns for the TVI®. Importantly, roll yield only applies to the commodity portion of the TVI® as the financials portion is not impacted.

Frequently, backwardation (if there is a discount price for the longer-dated futures contracts) is evident in rising markets where the TVI® would generally establish a long position; correspondingly, contango (if there is a premium price for the longer-dated futures contracts) is frequently evident in falling markets where the TVI® would generally establish a short position (except in Energy where it would be positioned flat). Since the TVI® can take both long and short positions, negative roll yield (more specifically contango) can be a source of returns rather than the drag on returns normally seen in long-only commodity indexes.

The general tendency of commodities to trade at discounts in uptrends and premiums in downtrends has exceptions. For example, Precious Metals always trade at premiums, as they are cost of carry assets. This means that the holding of the metals always has an interest cost.

The extent of roll yield returns is somewhat dynamic and dependent upon market conditions. Generally speaking, market environments with large price movements see less impact on profits/losses as a result of roll yield as most of the returns come from the spot movements. Inversely, market environments with small price movements generally see more impact on profits/losses as a result of roll yield.

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The TVI ® methodology is available here. Appendix A contains a list of amendments made to the index since its inception. Changes to an index methodology may have material impact on the results of the index, whether positive or negative. This description is intended solely to provide an introduction to the TVI® and further details are available upon request.

Roll yield - which may be positive or negative - can strongly influence the returns or losses from futures trading. Price differentials between nearby and longer-dated futures contracts can either contribute to or detract from not only the strength of any price trends but also the results of the TVI®. Furthermore, the relationship of the nearby contracts and longer-dated futures contracts (aka the "futures curve") is complex and depends on numerous factors including, among other things, interest rates, storage costs, convenience yield and volatility. In addition, there can be no assurance that TVI® commodity components will be positioned correctly (i.e., long or short) to benefit from roll yield; in fact, the opposite could be the case at any particular point in time.

No assurances can be made that the TVI® will achieve its objectives or that losses will be avoided. Past performance is not necessarily indicative of future results. Investors cannot invest directly in the TVI®. One of the risks associated with the TVI® is the complexity of the different factors which contribute to its results, as well as its correlation or non-correlation to other asset classes. The TVI® could decline in a wide range of different market scenarios, including ones in which other financial products rise substantially. Any factors which contribute to "trading ranges" (in which there is a lack of sustained, directional price movements in many markets) or “whipsaw” markets (in which price movements reverse suddenly or repeatedly) are likely to be adverse to the TVI®’s trend-following methodology. Investment products utilizing the TVI® are speculative and involve a substantial degree of risk. Products that utilize the TVI® should be considered long-term investments; over the short-term there is a much greater possibility that the products may decline substantially, causing significant losses. See “Summary of Risk Factors” in the Terms of Use.

EAM Partners L.P. itself does not provide portfolio management services or any other form of investment advice. In particular, EAM Partners L.P. itself does not direct client accounts or provide commodity trading advice based on or tailored to the commodity interests or cash markets or other circumstances of a particular client. None of the information or material on this website is intended, or should be used, as any form of advice or recommendation. All information provided herein is subject to change without notice.