Glossary
Alpha is a risk-adjusted measure of the active return on an investment. It is a measure of the manager’s contribution to performance.
Annualized Rate of Return ("AROR") is the geometric average return for a period greater than or equal to one year, expressed on an annual basis or as a return per year.
Annualized Standard Deviation measures the degree of variation of monthly returns around the mean (average) return. The higher the volatility of the investment returns, the higher the annualized standard deviation will be.
Asset Classes are broad categories of investments such as stocks, bonds and alternatives, including managed futures and real estate. Each asset class offers a distinct source of return and risk related to its basic function. In the case of stocks, an investor receives earnings potential in exchange for providing equity capital to companies.
Barclay BTOP50 Index® ("BTOP50"): The Index seeks to replicate the overall composition of the managed futures industry with regard to trading style and overall market exposure. The BTOP50 employs a top-down approach in selecting its constituents. The largest investable trading advisor programs, as measured by assets under management, are selected for inclusion in the BTOP50. In each calendar year the selected trading advisors represent, in aggregate, no less than 50% of the investable assets of the Barclay CTA Universe. To be included in the BTOP50, the following criteria must be met:
- Program must be open for investment.
- Manager must be willing to provide daily returns.
- Program must have at least two years of trading activity.
- Program’s advisor must have at least three years of operating history.
- The BTOP50’s portfolio will be equally weighted among the selected programs at the beginning of each calendar year and will be rebalanced annually.
The indices do not encompass the whole universe of CTAs. The CTAs that comprise the indices have submitted their information voluntarily. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. Managed Futures programs in the Barclay BTOP50 Index may be subject to leverage risk, volatility and risk of loss that may magnify with the use of leverage. Source: barclayhedge.com.
Breakout Model refers to trading systems that monitor price action that may break above a level of resistance and continue higher or break below a level of support and continue lower.
Diversification is the common sense practice of not putting all your eggs in one basket. Diversifying your investments across different asset classes can reduce your risk, thereby providing a more favorable risk-adjusted rate of return. Furthermore, investments within an asset class should also be diversified. For example, it is wise to invest your stock portfolio in different industries and a variety of companies. A managed futures portfolio can be similarly diversified among different trading advisors, among markets such as currencies, oil, corn, etc., and among trading styles, such as discretionary or systematic.
Correlation is a measure of the degree to which the value of different investment types move in the same direction; if they perform independently of one another, they are non-correlated, such as managed futures vs. stocks and bonds.
Correlation Coefficient, r, indicates both the strength and direction of the relationship between the independent and dependent variables. Values of r range from -1.0, a strong negative relationship, to +1.0, a strong positive relationship. When r=0, there is no relationship between variables x and y.
Managed Futures are a unique asset class, driven by the investment decisions of professional managers, known as Commodity Trading Advisors, or CTAs. These CTAs manage client assets using global markets (such as currencies, energy, grains, etc.) as an investment medium. They take short or long positions based on expected profit potential.
Maximum Drawdown, also known as "Worst Historical Loss," is the measure of risk that that illustrates the largest peak-to-valley decline, based on monthly rates of return, during a given time period.
A Mean Reversion Strategy generally seeks to identify instruments whose prices have deviated from, and therefore are likely to return to, their historical averages. If an instrument is trading below its historical average price, a mean reversion strategy generally would entail taking a long position on the instrument, while if an instrument is trading above its historical average price, a mean reversion strategy generally would entail taking a short position in the instrument.
Nonparametric Models is a method commonly used in statistics to model and analyze ordinal or nominal data with small sample sizes. Unlike parametric models, nonparametric models do not require the modeler to make any assumptions about the distribution of the population, and so are sometimes referred to as a distribution-free method.
S&P 500® Total Return Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes 500 leading companies in leading industries of the U.S. economy. Although the S&P 500® focuses on the large cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market.
Short Position refers to the sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value.
Volatility is a measure of fluctuation in the value of an asset or investment. Lower volatility improves the stability and lowers the risk of an investment portfolio. Including managed futures as part of a diversified portfolio helps to stabilize the overall ups and downs of your investments.
Volatility Expansion Model refers to the amount of uncertainty or risk around the changes in the price of a market. A higher volatility means that a markets price can potentially be spread out over a larger range of values. This means that the price of the market can change dramatically over a short time period in either direction. A lower volatility means that a markets value does not fluctuate dramatically, but changes in value at a steady pace over a period of time. Volatility models monitor and analyze the volatility movements, attempting to forecast the expansion or contraction of volatility.
Value at Risk (VaR) measures risk while it happens and is an important consideration when firms make trading or hedging decisions.