Options for a BESS Index

Fund-based options, cheating with hindsight, and the danger of the backtest bias featuring musings about how SEC rules might be adapted to BESS adverts

I’ve just returned from a three-week trip to China, and the following thoughts formed during the flight back and they carry a “jet-lag caution.” If you spot errors or inadequacies please let me know! Some time ago I might have let this sit for a while, but increasingly I’m acting on my belief in the value of errors in public discussion. No fear. Part of the value that you get from subscribing to Stratnergy is that the paid content is particularly fresh and unfiltered and interesting (at least to me). Please note also that I have now organised Stratnergy into themes. These appear on the website and can be used as filters. “Energy Markets” remains the core theme, but I look forward to developing the others.

Following on from the previous post, I think it’s worth outlining ways to develop indices for the market value of BESS or to at least achieve some of the aims that such indices might have.

An index, as we now agree, is defined by an underlying strategy. The most common type of strategy is to create a weighted portfolio of traded assets. The strategy then involves deciding which assets to include in the index, how to re-balance the index if the value of one asset changes significantly, and how to calculate the value of the index based on the values of the underlying securities. MSCI has a helpful overview of the steps involved.

How can we do something similar in the energy markets? Here are three options.