Optimizing the weights of futures commodities in a portfolio can reduce risk and increase return. The biggest risk is from serially correlation between commodities. For instance, we would expect there to be some correlation between the Dollar Index and other currencies. Systems are likely to be short the Dollar Index at times the other currencies are long. This can cause the risk to increase dramatically because they are both likely to be in drawdowns simultaneously. By optimizing weights, we can detect these problems and alter the portfolio accordingly.

You can choose to optimize in two different ways. The first is optimizing Return/Risk using the Markowitz solution where risk is the standard deviation of residuals of the equity curve around the linear regression line. This attempts to modify the weights so that the equity curve is as straight as possible, however drawdown is likely to increase. The second method is preferred and was suggested by Perry Kaufman, and defines risk as the standard deviation of drawdowns. As you can see below, the portfolio has not been optimized. Weights are all set to 1 except bonds which are set to 2.