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Definitions

  • What are Managed Futures?
  • How Do Managed Futures Work?
  • Why Managed Futures?
  • Definitions
  • Managed Futures Resource Center
  • Regulatory Bodies
  • A
  • B
  • C
  • D
  • E
  • F
  • H
  • I
  • K
  • L
  • M
  • N
  • O
  • P
  • Q
  • R
  • S
  • T
  • U
  • V
  • W
  • Y

A

  • Absolute Return

    An outright return achieved irrespective of overall market direction. Whereas traditional investments typically measure their success in terms of whether they track or outperform a key market benchmark or index (relative returns), hedge funds, CTAs and alternative investment strategies aim to achieve outright positive returns irrespective of whether asset prices or key market indices rise or fall (i.e. absolute returns rather than relative returns).

  • Accredited Investor

    An accredited investor is a sophisticated investor who meets or exceeds minimum SEC requirements for net worth and annual income especially as they relate to some restricted offerings. The SEC Criteria are as follows.

    Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer or general partner of a general partner of that issuer.

    Any natural person whose individual net worth or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000.

    Any natural person who had individual income in excess of $200,000 in each of the two most recent years or joint income with that person´s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.

    Any trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase of the securities is directed by a person who has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.

    Any organization that was not formed for the purpose of acquiring the securities being sold, with total assets in excess of $5,000,000.And, any entity in which all of the equity owners are Accredited Investors.

  • Active Risk

    A type of risk that a managed portfolio creates as it attempts to beat the returns of the benchmark against which it is compared. In theory, to generate a higher return than the benchmark, the manager is required to take on more risk. This risk is referred to as active risk. The more an active portfolio manager diverges from a stated benchmark, the higher the chances become that the returns of the fund could diverge from that benchmark as well. Passive managers who look to replicate an index as closely as possible usually provide the lowest levels of active risk, but this also limits the potential for market_beating returns.

  • Alpha

    Widely considered to be a measure of the “value added” by an investment manager. It is therefore regarded as a proxy for manager or strategy skill. Alpha is sometimes described as out performance of a benchmark or the return generated by an investment independent of the market – what an investment would hypothetically achieve if the market return was zero. More specifically, alpha is sometimes described as the return of an investment less the risk–free interest rate, or the return of the portfolio less the return on the S&P 500 index or some other relevant benchmark index.

  • Alpha Generator

    Any security that, when added to an existing portfolio of assets, generates excess returns or returns higher than a pre_selected benchmark without additional risk. An alpha generator can be any security; this includes government bonds, foreign stocks, or derivative products such as stock options and futures. Keep in mind that alpha itself measures the returns a portfolio produces in excess of the return originally estimated by the capital asset pricing model, on a risk_adjusted basis. Therefore, an alpha generator adds to portfolio returns without adding any additional risk, as measured by volatility or downside volatility. This follows modern portfolio theory in allowing investors to maximize returns while keeping a certain level of risk.

  • Alternative Investment

    The terms “alternative investment” and “hedge fund” often get used interchangeably as hedge funds are an important and growing part of the alternative investment arena, which also includes private equity and debt, venture capital and real estate. Do not confuse hedge funds with Managed Futures. Managed futures clients have their funds held in segregated accounts at an FCM.

    Alternative investment managers may take advantage of pricing anomalies between related financial instruments, engage in “momentum” investing to capture market trends, or utilize their expert knowledge of markets and industries to capture profit opportunities that arise from special situations. The ability to use derivatives, arbitrage techniques and, importantly, short selling – selling assets that one does not own in the expectation of buying them back at a lower price – affords alternative investment managers rich possibilities to generate growth in falling, rising and unstable markets.

  • Annualized Compound Rate of Return

    The rate of compound return (ROR) shown on an annualized basis. Obviously the higher the Rate of Return (ROR), the greater the historical annualized rate of performance.

  • Arbitrage

    The technique of exploiting pricing anomalies between related financial instruments within and between markets with the aim of producing positive returns independent of the direction of broad market prices. By establishing long positions in under_valued assets and short positions in over_valued assets, arbitrageurs aim to capture profit opportunities that arise from the changing price relationship between the assets concerned. Specific investment styles that apply arbitrage techniques include convertible bond arbitrage, fixed income arbitrage, statistical arbitrage, and merger or risk arbitrage.

  • Arbitration

    The process of settling disputes between parties by a person or persons chosen or agreed to by them. NFA´s arbitration program provides a forum for resolving futures–related disputes between NFA Members or between Members and customers.

  • Associated Person (AP)

    An individual who solicits orders, customers or customer funds on behalf of a Futures Commission Merchant, an Introducing Broker, a Commodity Trading Advisor or a Commodity Pool Operator and who is registered with the Commodity Futures Trading Commission.

  • At-the-Money Option

    An option whose strike price is equal, or approximately equal, to the current market price of the underlying futures contract.

  • Average Annual Return (AAR)

    A percentage figure used when reporting the historical return, such as the three_, five_ and 10_year average returns of a CTAs managed program.

  • Average Losing Month

    Average losing/negative month in percentage.

  • Average Positive Month

    Average positive month in percentage.

  • Average Recovery Time (ART)

    This is the average time in a recovery from a drawdown measured from the low point of the drawdown to a new peak.

  • Average ROR

    Compounded average annual rate of return, which is calculated using the final VAMI.
    where R is the compounded return.

B

  • Backwardation

    A futures market in which the relationship between two delivery months of the same commodity is abnormal. The opposite of Contango.

  • Barclay Index

    A futures market in which the relationship between two delivery months of the same commodity is abnormal. The opposite of Contango.

  • Basis

    The difference between the current cash price of a commodity and the futures price of the same commodity

  • Benchmark

    A standard against which the performance of an investment manager can be measured. Generally, broad market and market–segment stock and bond indexes are used for this purpose. When evaluating the performance of any investment, it´s important to compare it against an appropriate benchmark. In the financial field, there are dozens of indexes that analysts use to gauge the performance of any given investment including the S&P 500, the Dow Jones Industrial Average, the Russell 2000 Index .

  • Beta

    Beta is the slope of the regression line. Beta measures the risk of a particular investment relative to the market as a whole (the “market” can be any index or investment you specify). It describes the sensitivity of the investment to broad market movements. For example, in equities, the stock market (the independent variable) is assigned a beta of 1.0. An investment which has a beta of 0.5 will tend to participate in broad market moves, but only half as much as the market as a whole.

C

  • Call Option

    An option which gives the buyer the right, but not the obligation, to purchase (“go long”) the underlying futures contract at the strike price on or before the expiration date.

  • Calmar Ratio

    Return/risk ratio. Return is defined as the compound annualized rate of return over the last 3 years, risk as the maximum drawdown over the last 3 years.

    A ratio used to determine returns relative to drawdown´s (downside) risk in a futures portfolio or other similar investment vehicles. The Calmar ratio is determined by dividing the compounded annual return by the maximum drawdown, using the absolute value.

    Generally speaking, the higher the Calmar ratio the better. Some programs have high annual returns, but they also have extremely high drawdown risk. This ratio helps determine return on a downside risk–adjusted basis. Most Calmar ratios utilize 3 years of data.

  • Capacity

    The amount of investment capital that can be comfortably absorbed by a manager or strategy without a diminishing of returns. One useful indication of whether or not a manager or strategy faces capacity constraints is to analyze the degree to which they experience slippage in the execution of their strategy or trades.

  • Carrying Broker

    A member of a futures exchange, usually a clearinghouse member, through which another firm, broker or customer chooses to clear all or some trades.

  • Clear

    The process by which a clearinghouse maintains records of all trades and settles margin flow on a daily mark–to–market basis for its clearing members.

  • Clearing Member

    A member of an exchange clearinghouse responsible for the financial commitments of its customers. All trades of a non–clearing member must be registered and eventually settled through a clearing member.

  • Clearinghouse

    An agency or separate corporation of a futures exchange that is responsible for settling trading accounts, collecting and maintaining margin monies, regulating delivery and reporting trade data. The clearinghouse becomes the buyer to each seller (and the seller to each buyer) and assumes responsibility for protecting buyers and sellers from financial loss by assuring performance on each contract.

  • Commodity Futures Trading Commission (CFTC)

    The Commodity Futures Trading Commission (CFTC) is the federal agency that regulates futures and swaps markets in the United States. The agency began overseeing futures trading in 1975 after being formed by the Commodity Futures Trading Commission Act of 1974. The CFTC is charged with ensuring that commodity futures markets operate by the legal requirements set forth by the Commodity Exchange Act. Following the financial crisis of 2008, Congress also put the swaps market under the CFTC’s legal authority with the Dodd-Frank Wall Street Reform and Consumer Protection Act.

    The CFTC aims to preserve the essential functions of futures and swaps markets while minimizing their risks. The agency works to ensure transparency in the markets, block abuse of the trading systems, protect consumer investments and prevent the deleterious economic impacts of fraudulent trading practices. To this end, the CFTC polices and regulates trading intermediaries including commodity trading advisors, derivatives clearing organizations, swap dealers and futures commission merchants.

    The respective domains of futures and swaps markets are regulated on the advice of the CFTC’s five advisory committees: the Agricultural Advisory Committee, the Energy and Environmental Markets Advisory Committee, the Global Markets Advisory Committee, the Market Risk Advisory Committee and the Technology Advisory Committee. Each entity is overseen by a commissioner who serves a staggered five-year term. No more than three current commissioners may be aligned with a single political party.

    The CFTC is organized into four departments: the Division of Clearing and Risk monitors derivatives clearing organizations, the Division of Enforcement is responsible for the investigation and prosecution of legal violations, the Division of Market Oversight supervises trading practices and the Division of Swap Dealer and Intermediary Oversight regulates trading intermediaries and self-regulatory organizations. The agency’s operations are further supported by the Offices of the Chief Economist, Data and Technology, the Executive Director, General Counsel, the Inspector General, International Affairs, Legislative Affairs and Public Affairs.

  • Commodity Pool

    An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures or options contracts. Also referred to as a Pool.

  • Commodity Trading Advisor (CTA)

    Definition of a CTA

    A Commodity Trading Advisor (CTA) is an individual or company that provides advice on investing in managed futures. Services offered by CTAs include managing investment accounts and trading futures on behalf of clients. Although the title might suggest that CTAs deal exclusively in physical commodities such as grains, metals, and energy sources, managed futures can also include financial instruments like bonds and currency.

    Investing with a CTA

    Through investments in managed futures, CTAs present clients with the potential to decrease their overall portfolio risk and the opportunity to see a return in different market climates while providing increased transparency.

    In the United States, CTAs must register with the federal Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), a self-regulating body. CTAs operating outside of the U.S. are governed by their respective government regulatory body. Potential investors can confirm that a CTA is registered with both the CFTC and the NFA and check for disciplinary records through the NFA website. CTAs must provide clients with monthly account statements and maintain updated disclosure documents that outline their trading methodology, performance markers, investment risks and fees.

    The cost of investment can differ between CTAs and is influenced by the CTA’s strategy, performance record, and typical clientele profile. Potential fees include a management fee (based on the amount invested), an incentive fee (based on performance above a watermark), a per-trade fee, a percentage of interest income fee and a commission. All fees charged by a CTA must be clearly outlined in the Total Fee Load, one of the required disclosure documents. In addition to fees charged directly by the CTA, investors are responsible for paying taxes on their returns. Managed future profits are taxed at a split rate: 60 percent of income is taxed as long-term capital gains and the remaining 40 percent is taxed as short-term capital gains, which have a higher maximum tax rate.

    CTAs usually require a minimum investment, which varies depending on several factors. More experienced CTAs and those who serve high-net-worth investors, for example, are likely to set higher minimums. Generally, minimum required investments begin at $10,000.

    Becoming a CTA

    In order to become a CTA, a financial advisor or trader must first pass a proficiency exam. Most CTAs are required to take the National Commodity Futures Exam, unless, based on their NFA registration and business status, they are eligible for an alternative test. Before registering with the NFA, CTAs must also disclose prior disciplinary action against them and submit a fingerprint card.

    An individual or firm (including each employee who provides financial advice to the public) that wishes to conduct business as a for-profit CTA must register with both the CFTC and NFA. Individuals and companies who have provided advice to fewer than 15 people in the past year, those who disseminate specific kinds of educational materials, those who are registered as certain other types of financial advisors or who are educators and those who fall into several other categories outlined in the Commodity Exchange Act are exempt from the registration requirement. To receive a registration exemption, CTAs must file a notice of exemption with the NFA each year.

    The required NFA and CFTC registration fees represent a portion of the costs associated with operating as a CTA. Other potential expenses include office space rental, office equipment, marketing materials and administrative, legal, and accounting staff. Marketing funding can foster business growth, but marketing materials are tightly regulated. For example, all information in such materials must be factual and must be accompanied by clear statements of risk. Given the complicated rules governing CTAs, legal and accounting counsel can prevent regulatory violations and allow CTAs to focus more time on their own area of expertise.

  • Compound Annual Rate of Return (CARR)

    This is the rate of return which, if compounded over the years covered by the performance history, would yield the cumulative gain or loss actually achieved by the trading program during that period.

  • Compound Annual Return

    This is the rate of return which, if compounded over the years covered by the performance history, would yield the cumulative gain or loss actually achieved by the trading program during that period.

  • Compounding

    The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings

  • Contango

    A futures market in which prices in succeeding delivery months are progressively higher. The opposite of Backwardation.

  • Correlation

    Correlation is a measure of the interdependence or strength of the relationship between two investments. It tells us something about the degree to which the variations of returns from their respective means move together. So if two investments are positively correlated, when one performs above its mean return it is likely that the other will also perform above its own mean return. If two investments are negatively correlated, when one performs above its mean return it is likely that the other will perform below its mean return. Note that correlation says nothing about the mean returns themselves – they could both be up, or both down, or one could be up and one down. To measure the strength of the relationship, we use the correlation coefficient. Values range from –1 (perfect negative correlation), through 0 (no correlation or uncorrelated) to +1 (perfect positive correlation). From a risk management perspective, it is generally favorable if two investments are uncorrelated because it means that there is no identifiable directional pattern or proportional relationship between the deviations of their monthly returns from each of their respective trends – sometimes investment B is positively correlated to investment A when the returns of A are positive and negatively correlated when they are negative, meaning that over a period of time our strategy returns get closer to non–correlation. This produces a smoother overall return profile.

  • Correlation Coefficient

    The correlation coefficient is a statistical measure of the degree of linear relationship between two variables. The correlation coefficient may take on any value between plus and minus one. The sign of the correlation coefficient (+ , -) defines the direction of the relationship, either positive or negative. A positive correlation coefficient means that as the value of one variable increases, the value of the other variable increases as well; as one decreases the other decreases too. Taking the absolute value of the correlation coefficient measures the strength of the relationship. Thus a correlation coefficient of zero indicates the absence of a linear relationship and correlation coefficients of one and minus one indicate a perfect linear relationship.

    Where sX denotes standard deviation of the first variable, sY standard deviation of the second variable and where x and y are means of first and second variable.

  • Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means returns move inversely. One method of calculating covariance is by looking at return surprises (deviations from expected return) in each scenario. Another method is to multiply the correlation between the two variables by the standard deviation of each variable.

  • Covered Option

    A short call or put option position which is covered by the sale or purchase of the underlying futures contract or physical commodity.

  • Cumulative Return

    The aggregate amount that an investment has gained or lost over time, independent of the period of time involved. Presented as a percentage, the cumulative return is the raw mathematical return of the following calculation, Current price of Asset minus Original price of Asset divided by the Original price of Asset.

D

  • Deflation

    A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. To counter deflation, the Federal Reserve (the Fed) can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because businesses increase profits and take some of the depressive pressures off wages and debtors of every kind.

  • Delta

    The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes referred to as the “hedge ratio.”

  • Derivatives

    A financial instrument, traded on or off an exchange, the price of which is directly dependent upon the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement. Derivatives involve the trading of rights or obligations based on the underlying product but do not directly transfer property. They are used to hedge risk or to exchange a floating rate of return for a fixed rate of return.

  • Disclosure Document

    The document that must be provided to prospective customers that describes trading strategy, fees, performance, etc.

  • Downside Deviation

    Similar to Standard Deviation, but Downside Deviation only takes losing/negative periods into account. That´s why it does not penalize the program for higher than average return, but only for higher than average loss.

  • Drawdown

    A drawdown is any losing period during an investment. It is defined as the percent retrenchment from an equity peak to an equity valley. A drawdown starts with the beginning of an equity retrenchment and continuous until a new equity high is reached. (a drawdown encompasses both the period from the equity peak to the equity valley (length) and the time from the equity valley to the new equity high (recovery)). Maximum Drawdown is then the greatest cumulative percentage decline in equity.

E

  • Efficiency Index

    This is a ratio calculated by dividing the annual return by the annualized monthly standard deviation.

  • Efficient Frontier

    By plotting the intersection of risk and reward for different investments or weightings of assets, one can generate a risk/reward curve or ´frontier´ for those investments. The efficient frontier is the point on such curve where an investment combination delivers the most favorable balance of risk and reward.

  • Emerging Markets

    Emerging Markets funds invest in securities of companies, or the sovereign debt of developing or “emerging” countries. Investments are primarily long. “Emerging Markets” include countries in Latin America, Eastern Europe, the former Soviet Union, Africa and parts of Asia. Emerging Markets – Global funds will shift their weightings among these regions according to market conditions and manager perspectives. In addition, some managers invest solely in individual regions.

    Emerging Markets – Asia involves investing in the emerging markets of Asia.

    Emerging Markets – Eastern Europe/CIS funds concentrate their investment activities in the nations of Eastern Europe and the CIS (the former Soviet Union).

    Emerging Markets – Latin America is a strategy that entails investing throughout Central and South America.

F

  • Fundamental Analysis

    The underlying proposition of fundamental analysis is that there is a basic intrinsic value for the aggregate stock market, various industries or individual securities and that these depend on underlying economic factors. The identification and analysis of relevant variables combined with the ability to quantify the future value of these variables are key to achieving superior investment results. A wide range of financial information is evaluated in fundamental analysis, including such income statement data as sales, operating costs, pre–tax profit margin, net profit margin, return on equity, cash flow, and earnings per share.

    Fundamental analysis contrasts with technical analysis which contends that the prices for individual securities and the overall value of the market tend to move in trends that persist.

  • Futures

    Based on contracts to buy and sell physical and financial assets at future dates for predetermined amounts, futures are financial derivative instruments that hold relatively high leverage. A future’s market value depends on the price or rate variations of the particular asset involved. Participants including farmers, manufacturers, municipalities, importers, exporters and investors buy and sell futures contracts and options for both physical and financial assets in the global futures market.

    The modern futures exchange emerged from early United States agricultural markets, which, in the mid nineteenth century, began allowing the sale of what were called “forward contracts,” or agreements to buy and sell crops at a future date. Until that time, farmers were left with excess rotting crops in times of low demand and merchants were forced to pay steep prices for products when supply was low. These forward contracts served to reduce risk for farmers, merchants and producers and helped to balance competing interests in the agricultural sector.

    While futures trading was initially limited to agricultural commodities, including wheat, corn and other crops, the marketplace has expanded in the last several decades to incorporate additional types of products. Today’s futures market involves such metal and energy commodities as gasoline, crude oil, copper and gold, as well as financial instruments like interest rates, treasury bonds, securities, stock indexes and foreign currency. Thus, the futures market allows participants in a diverse set of industries to mitigate financial risk on a global scale.

    Increased regulation has accompanied this growth in the futures market. Federal oversight of futures trading in the United States began under the Department of Agriculture in the 1920s. The Commodity Futures Trading Commission Act of 1974 mandated the creation of the Commodity Futures Trading Commission (CFTC) and allowed for the formation of the National Futures Association (NFA), the industry’s self-regulatory body. The CFTC and NFA are charged with monitoring and regulating safe, competitive futures markets in the United States.

  • Futures Commission Merchant (FCM)

    A Futures Commission Merchant (FCM) is an individual or firm that buys or sells futures contracts, commodity options, retail off-exchange foreign currency contracts or swaps on the behalf of customers. FCMs may solicit or accept customer orders for futures contracts either for payment of cash or other assets or on credit. They act as liaisons between commodity buyers and sellers.

    As mandated by the Commodity Exchange Act, all U.S.-based FCMs who buy and sell commodities for customers in the U.S. must register with the federal Commodity Futures Trading Commission (CFTC) unless they conduct business only on behalf of themselves, their firm or their firm’s affiliates, officers or directors. Every FCM who is registered with the CFTC must also register with the National Futures Association (NFA). In addition, FCMs may register as members of various commodity exchanges.

    FCMs are required to regularly report certain information to the CFTC, the NFA and the other self-regulatory organizations to which they belong. FCMs must submit unaudited monthly financial reports as well as annual reports that have been certified by an independent auditor to the CFTC and the NFA. The NFA further requires that FCMs complete an information-gathering questionnaire at the time of application for membership and before each annual renewal. The NFA may also request other documentation from FCMs, including asset lists, customer transaction records, disaster recovery plans, bank statements and proof of promotional material compliance.

    FCMs must also provide certain documentation to customers. Before opening a new customer account, FCMs are required to obtain each customer’s signature on a form that outlines the risks associated with futures trading, and, if applicable, information regarding trading in foreign markets. Customers must authorize each transaction an FCM makes on their behalf, and FCMs are required to provide customers with confirmation of all transactions and monthly statements that detail all transactions, related debits and credits and the account balance.

  • Futures Contract

    A futures contract is a legal agreement between two parties for the sale and purchase of a physical commodity or financial instrument at a future date. Because its value depends on the price of the asset it involves, a futures contract is classified as a derivative product. Futures contracts were originally developed to provide producers and manufacturers the opportunity to mitigate the financial risks associated with price fluctuations of the agricultural commodities with which they dealt, but the modern futures market also allows speculators to trade futures contracts as an investment activity.

    Futures contracts are traded on futures exchanges, and the trading activity is typically coordinated through clearing houses, which act as intermediaries between buyers and sellers. The contracts outline the specifics of the underlying transaction; they define the commodity or instrument involved, the details of delivery and the predetermined price or rate. Certain aspects of a futures contract (the quality and quantity of the asset and the date, method and location of its delivery) are standardized to enable trading across futures exchanges. In addition, each contract includes both a long (the buyer) and short (the seller) position. The commodity’s price per unit, on the other hand, is variable.

    While some participants in the futures market (farmers and food processors, for example) use futures contracts to lock in prices on commodities they will actually buy or sell, most contracts are settled in cash. This contract settlement without delivery often occurs through a process called offsetting, in which futures contract holders “reverse” the trade with a subsequent counter transaction that closes their position in the contract, thereby eliminating their obligation to make or take delivery of an asset.

    As a result, price fluctuations in the futures market generally correspond with the actual values of commodities in the cash market. This activity gives investors, as well as those who eventually buy or sell the underlying commodities on the cash market, the opportunity to profit by hedging or speculating on the future prices of various assets by buying and selling futures contracts.

  • Futures Industry Association (FIA)

    The Futures Industry Association (FIA) is a trade organization whose membership includes Futures Commissions Merchants (FCMs) and other firms and professionals from the United States, Europe and Asia who are associated with global futures, options and cleared swaps markets. Based in Washington, D.C., the FIA was formed in 1955 to provide information about and advocate for issues relating to the futures industry.

    The mission of the FIA is to ensure market transparency, foster competitive trading and promote financial integrity in futures markets. The FIA supports fair trade and effective industry regulation through its legislative lobbying efforts. The organization provides education to policymakers, professionals and the public on such key issues as automated trading, international practices, customer fund protection and reporting requirements by publishing position papers and offering official statements and testimony.

    Affiliate divisions of the FIA include FIA Americas, FIA Europe and FIA Asia. FIA Global, an umbrella structure comprised of these regional affiliates, coordinates advocacy and education efforts across international markets. Firms engaged in trading their own capital on futures, options and equities markets in the Americas and Europe are represented by the FIA Principal Traders Group and the FIA European Principal Traders Association, respectively. FIA Tech, another subsidiary, promotes market efficiency through software solutions. The FIA is also affiliated with the Institute for Financial Markets (IFM), a non-profit foundation that offers unbiased industry information and training.

    The FIA offers two levels of membership. FCMs who are registered in the United States may join the organization as regular members, while other groups and professionals, including international exchanges and clearinghouses, commodity trading advisors, introducing brokers, law firms and technology vendors, are considered associate members. The organization estimates that its members, who represent more than 25 countries, conduct over 85 percent of customer trading on U.S. futures exchanges. FIA members receive access to special industry reports and statistics, educational conferences and best practice information.

H

  • High Watermark

    A requirement that an investment program must recoup any prior losses before the investment manager may take a performance (incentive) fee. In addition to performance losses, prior losses may include any combination of fees that the investment manager charges, such as management and administrative fees.

  • Hurdle Rate

    The level of return (often the risk–free interest rate) which investment managers sometimes stipulate net new highs must exceed in order for performance fees to be charged.

I

  • Incentive Fee

    Fee paid as an incentive to the general partner of a hedge fund or a Commodity Trading Advisor, the amount of which depends on his/her performance, usually relative to some benchmark index. Such a form of compensation could in fact extend to any financial professional, but tends to be most common among people directly responsible for managing funds.

  • Intrinsic Value

    The amount by which a call or put option is in the money, calculated by taking the difference between the strike price and the market price of the underlier.

  • Investment Strategy

    An investment strategy is a plan for allocating assets in an investment portfolio. Investment strategies are driven by individual investment philosophies and approaches that attempt to balance an investment’s rates of risk and return based on such factors as the investor’s financial goals, risk tolerance and time horizon. Because it plays a significant role in determining profits and losses, investment strategy is an important consideration.

    Given the diversity of the investment opportunities, account managers and investors that influence their development, there are a wide variety of investment strategies from which to choose. For instance, some strategies involve greater risk to increase growth and maximize profits, while others take more conservative approaches in an effort to curtail loss. In addition, many investors employ a top-down approach to select investments based on broad market themes; others focus on investment-specific criteria in bottom-up strategies. Still other investors aim to create balanced portfolios that utilize diverse investment strategies.

    While the differences between individual investment strategies are nearly unlimited, most approaches fall into several general categories. Investment strategies may be guided by the length of investment, as in the case of buy and hold strategies that depend on long-term market growth or day trading techniques that capitalize on daily market fluctuations. Other investment strategies involve allocating assets based on market trends: some investment managers employ a sector-based style that focuses on the ups and downs of a particular industry, for example, and others attempt to profit from seemingly under-priced investments in value-style trading.

    Investors should consider their financial goals, risk tolerance and personal circumstances to select an investment strategy that aligns with their objectives. Both short- and long-term earning requirements, which may be determined by factors like future income potential or immediate savings goals, generally define an investor’s time horizon, or the length of investment. Investors must also understand how their risk tolerance—their level of comfort with potential investment volatility—corresponds with an investment’s risk profile. Many investment websites and account managers offer risk tolerance and investment style questionnaire tools to help investors identify the most appropriate investment strategies.

K

  • Kurtosis

    Kurtosis characterizes the relative peakedness or flatness of a distribution compared with the normal distribution. Positive kurtosis indicates relatively peaked distribution. Negative kurtosis indicates relatively flat distribution.

    where ri is the return of the i-th month, r is the average monthly return, n denotes the number of months and s is the standard deviation of the monthly returns.

L

  • Leverage

    Leverage and gearing effectively mean the same thing: the process or effect of ´gearing up´ or magnifying exposure to an investment strategy, manager or asset. Leverage can be achieved by borrowing capital or using derivatives . A leveraged investment is subject to a multiplied effect in the profit or loss resulting from a comparatively small change in price. Thus leverage offers the opportunity to achieve enhanced returns, but at the same time can result in a loss that is proportionally greater than the amount invested.

  • Lock-Up

    A time period during which a new investor in a hedge fund or CTA may not withdraw any capital committed to the strategy.

M

  • Macro

    Macro involves investing by making leveraged bets on anticipated price movements of stock markets, interest rates, foreign exchange and physical commodities. Macro managers employ a “top down” global approach, and may invest in any markets using any instruments to participate in expected market movements. These movements may result from forecasted shifts in world economies, political fortunes or global supply and demand for resources, both physical and financial. Exchange traded and over–the–counter derivatives are often used to magnify these price movements.

  • Managed Futures

    Managed futures are alternative investment vehicles in which money managers (typically commodity trading advisors, or CTAs) invest in futures contracts for products ranging from agricultural and energy commodities to currency and other financial instruments on the behalf of their clients. Traded on more than 150 heavily regulated global futures markets, managed futures are highly liquid investments.

    Managed futures investments involve the purchase and/or sale of futures contracts (legal agreements to buy or sell a physical commodity or financial product at a future date), but few participants in the futures market actually deliver or receive any goods. Instead, investors, or the CTAs with whom they hold accounts, buy and sell futures contracts on futures exchanges. Most of these trades are conducted through the clearing houses associated with each exchange. Because the contracts are technically both bought from and sold to the same party, namely, the clearing house, futures contracts are usually offset and thus effectively function as financial instruments with which to invest.

    Some participants in the futures market (producers and manufactures, for example) eventually buy or sell the actual underlying asset and use futures contracts to hedge against the risks associated with fluctuating prices. Other investors, though, including those whose participation is directed by CTAs as part of a managed futures program, act as speculators who attempt to profit from market fluctuations. The resulting changes in the values of futures contracts account for the gains and losses experienced by investors in managed futures; as the prices of the underlying product rise and fall, investors’ accounts are credited and debited accordingly on a daily basis.

    CTAs that operate managed futures investments employ a diverse set of strategies to attempt to predict—and ultimately help their clients profit from—the rising and declining values of futures contracts. Using proprietary trading systems and methods of analysis that are typically unique to each individual or firm to make predictions on the potential for profit, CTAs may choose to invest client funds in both long and short positions in various sectors of the futures market. Since they maintain individual accounts, investors in managed futures programs are able to observe both the trading activities conducted by the CTA on their behalf and the resulting daily gains or losses.

  • Margin

    The amount of capital that has to be deposited as collateral in order to gain full exposure to an asset.

  • Market Neutral

    Denotes an approach to investment where the emphasis is on the value of securities relative to each other and the use of arbitrage techniques, rather than market direction forecasting. By emphasizing the relative value of securities and the exploitation of pricing anomalies between related securities, practitioners of market neutral approaches aim to generate profits regardless of the overall direction of broad market prices. Market neutrality is generally achieved by offsetting or hedging long and short positions or maintaining balanced exposure in the market. The term market neutral can be applied with some justification to the majority of alternative investment styles because of their ability to capitalize both on upward or downward price moves or to profit in a wide range of market environments.

  • Market Timing

    Market Timing involves allocating assets among investments by switching into investments that appear to be beginning an uptrend, and switching out of investments that appear to be starting a downtrend.

  • Mark–to–Market

    No Entry

N

  • National Futures Association (NFA)

    Authorized by Congress in 1974 and designated by the CFTC in 1982 as a “registered futures association,” NFA is the industry wide self–regulatory organization of the futures industry. The NFA regulates the trading of futures, foreign currency and swaps. The organization began in 1982 after such self-regulatory groups were sanctioned by the Commodity Futures Trading Commission Act, the same legislation that created the Commodity Futures Trading Commission (CFTC).

    The NFA aims to preserve the integrity of and investor confidence in the derivatives market by regulating the individuals and firms that operate in the market. It functions independently and does not engage in trading activities. The NFA is a non-profit organization funded by membership-related fees; the association receives no public funds. Under the Commodity Exchange Act, most individuals and firms who trade in the derivatives market, including those who work with public investments in futures exchanges, swaps and retail off-exchange foreign currency, are required by law to register with the NFA. Current NFA membership includes over 4,000 companies and nearly 60,000 individuals.

    The NFA’s regulation of the derivatives industry starts with member registration. The organization screens prospective members to establish their competence with measures like FBI background checks and thorough proficiency exams. Each NFA member must adhere to strict compliance regulations related to bookkeeping, public disclosures, capital requirements and sales procedures. The NFA conducts routine audits of its members to ensure compliance. Non-compliant members are subject to penalties from the NFA, which can include fines, suspension or revocation of membership and bans on future trading activities.

    In addition to overseeing member activity, the NFA monitors overall trade and market practices. Merchants are required to submit periodic reports disclosing operational details such as balances, draw downs, capital requirements and investment methods to the NFA, other self-regulatory bodies and the CFTC. The NFA further protects investors through an arbitration program and public education. The organization publishes informational investment and finance documents and maintains the Background Affiliation Status Information Center (BASIC), a public database of financial, membership and disciplinary information about merchants.

  • National Introducing Brokers Association (NIBA)

    NIBA is a non–profit organization for guaranteed and independent introducing brokers.

  • Net Asset Value

    The value of each unit of participation in a commodity pool. Basically a calculation of assets minus liabilities plus or minus the value of open positions when marked to the market, divided by the total number of outstanding units.

  • Net New Highs

    A net new high is reached when the net asset value of an investment exceeds the previous peak level in the net asset value (also known as the ´high watermark´). Performance fees are levied on net new highs.

  • Notional Funding

    Notional funding is the term used for funding an account below its nominal value. For example, assume a CTA requires a minimum investment of $1,000,000 (the “Nominal Value”) and the margin requirement is $50,000.

    The investor can either deposit $1,000,000 to “fully fund” that minimum investment requirement or she can invest only a portion of the $1,000,000, as long as she meets the $50,000 margin requirement. Now assume that the investor decides to fund the $1,000,000 account with $100,000 (the “Funding Level”). This means that the investor is using leverage of 10X—ten times $100,000 equals the $1,000,000 minimum investment. The difference between the Nominal Value ($1,000,000) and the Funding Level ($100,000) is $900,000. The $900,000 is referred to as “Notional Funding”. Please see below a notional funding matrix that shows the impact on returns and losses based on the notionally funded amount:

O

  • Option

    A derivative instrument that gives the holder the right, but without any obligation, to buy (call) or sell (put) a security or asset at a fixed price within a specified period or at a particular future date.

P

  • Performance Fee

    A performance fee (sometimes called an incentive fee) is the fee charged by a CTA or other investment manager on an account’s profits. Commonly their primary compensation, the performance fee acts as an incentive for account managers to maximize returns on behalf of their investors; a CTA’s performance fee earnings rise with the value of an investor’s account.

    Performance fees are typically based on investment account gains, often whether realized or unrealized. (An investor earns unrealized gains when an asset’s market value increases, but does not collect realized gains until cash is received from the sale of the profitable asset.) In general, the portion of an account’s profit that is subject to a performance fee is determined using a high-water mark: the fee is assessed only on an account’s gains over its previous highest value, or high-water mark. Some managers also employ a hurdle rate—a level above which profits must rise before the fee will be collected—to calculate performance fees.

    A performance fee is charged as a percentage of investment profits. On average, most CTAs and investment managers assess an annual performance fee of 20 percent of investment profits, which is usually collected in prorated monthly deductions. The actual amount of this figure may depend on several factors, including the manager’s trading philosophy and experience level. In addition, many CTAs offer adjustable fee scales based on investment level.

    Like many other aspects of the investment industry, performance fees are subject to government regulation. The Investment Advisers Act of 1940 mandates that investment managers may only charge performance fees to clients who meet certain net worth and invested asset requirements, or those who the law deems to be “qualified purchasers.” The U.S. Securities and Exchange Commission adjusts these asset and investment thresholds every five years for inflation. By law, a CTA’s performance fee amounts and calculation methods must be clearly outlined in the manager’s disclosure document (D-Doc).

  • Pro-Forma

    A representation of a track record that is developed to show the effect on actual performance of intended or potential adjustments for different fee structures, portfolio allocations or other variations in the investment structure upon which the original track record is based. It is important to note that a pro-forma is based on actual trading results and differs from a simulation, which models the hypothetical performance of a portfolio or investment approach that has yet to be applied or implemented in actual trading.

Q

  • Quantitative Analysis

    Quantitative analysis uses statistical techniques to develop investment models using key financial ratios and economic indicators. The use of objective data facilitates the comparison of a large universe of investment products to identify a select range of potential investment possibilities. Quantitative analysis deals with measurable factors in contrast from qualitative considerations such as the character of management.

R

  • Rate of Return (ROR)

    ROR is the ratio of money gained on an investment relative to the amount of money invested. It is calculated using the compounding effect. With it the ROR for n months Rn is computed as:
    where Di are monthly performance data (one value per month).

  • Redemptions

    The time period in which an investor in a hedge fund or a mutual fund may withdraw his or her capital from the fund. For example, quarterly redemption allows an investor to withdraw capital every quarter.

  • Risk_Adjusted Performance

    Risk relative to return – the return achieved per unit of risk or the risk associated with a particular level of reward, typically represented by the Sharpe ratio. Improving the risk–adjusted return depends either on increasing returns and maintaining the level of risk, or maintaining the level of returns and lowering the associated risk.

S

  • Segregated Account

    A special account used to hold and separate customers´ assets from those of the broker or firm.

  • Self_Regulatory Organization (SRO)

    Self–regulatory organizations (i.e., the futures exchanges and National Futures Association) enforce minimum financial and sales practice requirements for their members.

  • Sharpe Ratio

    The Sharpe Ratio is a measure of the risk-adjusted return of an investment.

    where r is the average monthly return, rr f is the risk-free return (we use 1% per year as a risk-free return) and s is the standard deviation of the monthly returns over the same period.

    This gives you s, the monthly Sharpe you can annualize by multiplying it by the square root of 12.

    Sharpe ratio is a measure of risk–adjusted performance that indicates the level of excess return per unit of risk. In the calculation of Sharpe ratio, excess return is the return over and above the short–term risk free rate of return and this figure is divided by the risk, which is represented by the annualized volatility or standard deviation. In summary the Sharpe Ratio is equal to compound annual rate of return minus rate of return on a risk–free investment divided by the annualized monthly standard deviation. The greater the Sharpe ratio the greater the risk–adjusted return.

  • Skewness

    Skewness characterizes the degree of asymmetry of a distribution of returns around its mean. Positive skewness indicates a distribution with an asymmetric tail extending toward more positive values. Negative skewness indicates a distribution with an asymmetric tail extending toward more negative values.

    where ri is the return of the i-th month, r is the average monthly return, n denotes the number of months and s is the standard deviation of the monthly returns.

  • Slippage

    The difference between the sample or target price for buying or selling an asset and the actual price at which the transaction takes place.

  • Sortino Ratio

    Return/risk ratio. The concept and formula as in Sharpe ratio. The only difference is that it is calculated using standard deviation of negative returns only as s (returns below a minimum acceptable threshold).

    Sortino ratio is a measure of risk–adjusted performance that indicates the level of excess return per unit of downside risk. It differs from the Sharpe ratio in that it recognizes investors´ preference for upside (´good´) over downside (´bad´) volatility and uses a measure of ´bad´ volatility as provided by semi–deviation – the annualized standard deviation of the returns that fall below a target return, say the risk free rate.

  • Standard Deviation

    Standard deviation measures the degree of variation/uncertainty of returns around the mean/average return. The higher the volatility of the investment returns, the higher the standard deviation. That is why the standard deviation is often used as a measure of risk.where s2 also denoted as s2 is variance, xis are values and x is mean of values.The square root of the variance s is the standard deviation.

  • Sterling Ratio

    Return/risk ratio. Return is defined as the compound annualized rate of return over the last 3 years. Risk is defined as the average yearly maximum drawdown over the last 3 years less an arbitrary 10%.

    This ratio is also a comparison of historical reward and risk and was developed by Deane Sterling Jones. The Sterling Ratio is equal to the average annual rate of return for the past three calendar years divided by the average of the maximum annual drawdown in each of those three years plus 10%.

  • Strategy

    The particular investment process employed by a manager in the application of an investment style.

  • Stress Testing

    Stress testing is a method of determining how the program will behave during a period of financial crisis. We use the worst monthly S&P500 returns as a stress time. You can also use hypothetical scenarios (for example Monte Carlo simulation) or known historical events (for example Russian debt default in 1998 or 9/11 terrorist attacks).

  • Structured Product

    Typically provides principal protection, invests across a range of styles and managers, provides increased investment exposure and requires a high level of structuring expertise with respect to blending investment approaches, financing, liquidity and risk management.

T

  • Technical Analysis

    The basic premise of technical analysis is that prices move in trends that persist and this characteristic can be used to achieve superior returns. Technical analysis often uses computer programs to examine market data such as prices and volume of trading to make an estimate of future price trends and an investment decision. Unlike fundamental analysis, technical analysis is not concerned with the financial position of a company.

  • Total Return

    The total percentage return of an investment over a specified period, calculated by expressing the difference between the investment´s initial price and final price as a percentage of the initial price.

  • Track Record

    The actual performance of an investment since inception, usually represented by audited monthly returns, net of fees.

  • Trend

    The general direction of the market, a relatively persistent upward or downward price movement over a period, sometimes represented by the mean of price changes in that period.

U

  • Unit

    A generic term used to describe the ´instrument´ (share, bond, unit) which is issued by a product. Investors subscribe to or invest in a product by buying units and redeem their holding by selling units at the prevailing net asset value per unit, as detailed in the relevant product prospectus.

V

  • Value at Risk (VAR)

    This is the maximum amount of capital that the position can expect to lose within a specified holding period (we use 1 month period) and with a specified confidence level (we use 95%). Example: if VAR is -10%, you can expect that 95% of the next month returns will be better than -10%.

  • Value_Added Monthly Index (VAMI)

    VAMI is defined as the growth in value of an average $1000 investment. VAMI is calculated by multiplying (1 + current monthly ROR) X (previous monthly VAMI). VAMI assumes the reinvestment of all profits and interest income. Incentive and Management Fees have been deducted.

  • Volatility

    Volatility is the measurement of risk used most often in the investment industry. Put simply, it measures how variable price changes are in relation to the price trend for an investment. It is important to note that volatility says nothing about the direction of the trend itself. Expressed in slightly more technical terms, volatility is a measure of how much a set of returns for an investment deviates from the price trend or mean of that investment. It is usually calculated as ´standard deviation´ and expressed as ´annualized volatility´ – the standard deviation on a yearly basis

W

  • Weighting

    The relative proportion of each of a group of securities or asset classes within a single investment portfolio.

Y

  • Year To Date ROR

    Current year’s return, calculated by summing the returns of current year months using the compounding effect.

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© 2025 All rights reserved. aiSource is a D.B.A. of Lakefront Futures & Options, LLC.

Past performance is not necessarily indicative of future results. Trading commodity futures, options, and foreign exchange (“forex”) involves substantial risk of loss and is not suitable for all investors. In no way is the advisor of the month a direct recommendation of aiSource or any of its affiliates. Please carefully review the disclosure documents and any other promotional material prior to investing with any program. Managed accounts and/or managed futures are very risky and may not be suitable for all investors. Please consult with a Managed Futures specialists prior to investing.

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