Adaptive trend following dynamically determines allocations based on a systematic assessment of the current market regime. These strategies aim to identify the most favorable time horizon, assess the probability of a trend reversal, and establish positions accordingly.
Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund’s alpha.
Annualized Standard Deviation (Volatility) 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.
Arbitrage is an investment strategy that seeks to exploit price differentials existing as a result of market inefficiencies. Arbitrage typically involves the purchasing of a security in one market, while selling an instrument with similar performance characteristics in another market.
Backwardated or Backwardation refers to a market configuration where futures contract prices decrease, as maturities get longer.
The Barclay BTOP50 Index® (“BTOP50”) 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 index does not encompass the whole universe of CTAs. The CTAs that comprise the index 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.
The Barclays Capital US Aggregate Bond Index® covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed rate and hybrid ARM pass-throughs), ABS, and CMBS sectors. The U.S. Aggregate Index is a component of the U.S. Universal Index in its entirety. The index was created in 1986, with index history backfilled to January 1, 1976. Source: barclayhedge.com.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it is theoretically 20% more volatile than the market.
Breakout is a set of trading rules that generate buy or sell signals based on current price relative to its historical high or low prices over a period of time. For example, “Buy when the price exceeds the high of the previous four calendar weeks.”
CBOE Volatility Index "VIX" is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge."
Collateralized refers to an asset pledged as recourse to a lender in the event that the borrower defaults on the initial loan. Collateralization of assets gives lenders a sufficient level of reassurance against default risk, which allows loans to be issued to individuals/companies with less than optimal credit history/debt rating.
A Commodity Trading Advisor (“CTA”) is a trader who may invest in more than 150 global futures markets. They seek to generate profit in both bill or bear markets, due to their ability to go long (buy) futures positions, in anticipation of rising markets, or go short (sell) futures positions, in anticipation of falling markets.
Commodity Pools are private investment structures that combines investor contributions to be used in the futures and commodities trading markets. The commodity pool, or fund, is used as a single entity to gain leverage in trading, in the hopes of maximizing profit potential. The title "commodity pool" is a legal term as set forth by the National Futures Association (NFA). Commodity pools in the United States are regulated by the Commodity Futures Trading Commission (CFTC) and the National Futures Association, rather than by the Securities and Exchange Commission, which regulates other market activity.
Contrarian – Unlike trend-following models, which generate buy (sell) signals in the early stage of an upward (or downward) trend, contrarian models generate buy (or sell) signals at the end of the turning point of a downward (or upward) trend.
Correlation Coefficient is a statistical measure of how two investments move in relation to each other. A correlation of +1.0 implies that as one investment moves, either up or down, the other investment will move lockstep, in the same direction. A correlation of -1.0 means that if one investment moves in either direction the other investment will move in the opposite direction. A correlation of 0 indicates that the movements of the investments have no correlation; they are completely random.
Curve Fitting is generally used in a pejorative sense to denote a model that has been excessively manipulated in order to fit historical data. Such a model usually does not perform well in out-of-sample time periods. By contrast, a more robust model is one that is more generally applicable over different time periods and data samples.
Derivative Contract is a financial contract which derives its value from the performance of another entity such as an asset, index, or interest rate, called the "underlying." Derivatives are one of the three main categories of financial instruments, the other two being equities (i.e. stocks) and debt (i.e. bonds and mortgages).
Directional Methods refers to a strategy used based on the belief that long or short positions are able to correctly predict the movement of trading strategies based on the direction of price movements.
Diversified Spread Trading is the sale of multiple, diversified futures contracts and the purchase of other multiple, diversified offsetting futures contracts. A spread tracks the difference between a long and short position. In spread trading, risks move beyond price fluctuation to risks that involve the difference between two or more sides of a spread.
The Dow Jones REIT Composite Index℠ aims to represent all publicly trader real estate investment trusts (REITs) included in the Dow Jones Indices U.S. stock universe and covers approximately 100% of the total REIT market value. Periodic and ongoing reviews of the index composition, free float factors and shares outstanding are conducted based on the following rules:
- All publicly trader companies in the Dow Jones Indices U.S. stock universe that have elected to be taxed as REITs will be included in the index.
- During the quarter, a component company’s float-adjusted shares outstanding will be adjusted whenever and at the same time a change in that company is made in the Dow Jones U.S. Total Stock Market Index℠.
- A REIT that drops its REIT status and becomes taxed as a “C” corporation will be removed from the REIT Index immediately upon completion of the change of the tax status.
- If an index component enters bankruptcy proceedings, it will be removed from the index and will remain ineligible for re-inclusion until it has emerged from bankruptcy. However, the Dow Jones Index Oversight Committee may, following a review of the bankrupt company and the issue involved in the filing, decide to keep the company in the index.
- The Dow Jones Index Oversight Committee may, at its discretion, remove a company it has determined to be in extreme financial distress from any index to which it belongs. If the committee deems the removal necessary to protect the integrity of the index and the interests of investors in products linked to that index.
- REITs will be added to the Index after the close of trading on the third Friday of each month. The additions include all non-component REITs that meet inclusion standards as of the close of trading on the second Friday of that month, whether from IPOs, conversation to REIT status or new exchange listings.
Drawdown – A position or portfolio is in a drawdown when it incurs a loss relative to its all-time high profit or return. For example, a portfolio that starts off at $100 today is worth $100 tomorrow, and worth $99 the day after is in a 10% drawdown, because it is down $11 from the high of $100.
Earnings Growth Rate is the percentage gain in net income over time.
Emerging managers are investment managers that are newly created and have a small asset base. They are typically specialized and run by managers that believe they can attain higher returns by being focused and nimble. The criteria are evolving for defining exactly which managers should be considered emerging. Some consider funds with less than $500 million under management to be emerging, while others place that threshold at $2 billion. Others consider a definition of emerging managers to include a component relating to minority- or women-owned firms.
Equal-Weighting Strategy is a strategy employed that gives the same weight, or importance, to each stock in a portfolio. The smallest companies are given equal weight to the largest companies in an equal-weight index fund or portfolio. This allows all of the companies to be considered on an even playing field.
Expected Returns is an estimation of the value of an investment, including the change in price and any payments or dividends, calculated from a probability distribution curve of all possible rates of return. In general, if an asset is risky, the expected return will be the risk-free rate of return plus a certain risk premium. Also called expected value.
Exponential Smoothing is a statistical technique for detecting significant changes in data by ignoring the fluctuations irrelevant to the purpose at hand. In exponential smoothing (as opposed to in moving averages smoothing) older data is given progressively less relative weight (importance) whereas newer data is given progressively greater weight. Also called averaging, it is employed in making short-term forecasts.
Factor-based trend following aggregates markets into statistical factors using correlation information to create weighted indices of markets. Indices are then traded using traditional trend following methods.
Financial Futures are futures contracts on financial instruments, such as currencies, treasury bonds, equity indices.
A Forward Contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. Unlike standard futures contracts, a forward contract can be customized to any commodity, amount and delivery date and settlement can occur on a cash or delivery basis.
FTSE NATREIT US Real Estate Index provides investors with a comprehensive REIT performance benchmark that spans the commercial real estate space across the US economy. Source: PerTrac Financial Solutions.
Fundamental Analysis (also known as Discretionary Analysis) is the study of basic, underlying factors that will affect the supply and demand of an investment. With respect to commodity futures, fundamental analysis may look at crop reports, weather patterns, economic reports and other fundamental data to determine whether to buy or sell the futures contract.
Futures Contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed upon today (the futures price or strike price) with delivery and payment occurring at a specified date, the delivery date. The contracts are negotiated at a futures exchange, which acts as an intermediary between the two parties. The party agreeing to buy the underlying asset in the future, the "buyer" of the contract, is said to be "long", and the party agreeing to sell the asset in the future, the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties - the buyer hopes or expects that the asset price is going to increase, while the seller hopes or expects that it will decrease in the near future.
Global Macro/Global Trading is a strategy that trades equity, bond, currency and commodity markets based generally on global macroeconomic developments. Within the global macro category, systematic macro strategies use mathematical or computer models to identify trends and select investments, in contrast to discretionary macro strategies, which use primarily fundamental analysis.
Hedge is to make an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
The HFRX Equity Hedge Index encompasses various equity hedge strategies, also known as long/short equity, that combine core long holdings of equities with short sales of stock, stock indices, related derivatives, or other financial instruments related to the equity markets. Net exposure of equity hedge portfolios may range anywhere from net long to net short depending on market conditions. It is constructed using robust filtering, monitoring and quantitative constituent selection process using the Hedge Fund Research database (HFR Database), an industry standard for hedge fund data.
The HRFX® Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It is composed of all eligible hedge fund strategies, including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event drive, macro, merger arbitrage, and relative value arbitrage. The strategies are asset weighted based on the distribution of assets in the hedge fund industry. Source: hedgefundresearch.com
The ICE Futures US Dollar Index (USDX®) is a leading benchmark for the international value of the U.S. dollar and the world’s most widely recognized, publicly trader currency Index. Source: theice.com
Idiosyncratic Risk is risk specific to an asset or a small group of assets. Idiosyncratic risk has little or no correlation with market risk, and can therefore be substantially mitigated or eliminated from a portfolio by using adequate diversification.
The Investment Company Act of 1940 is a piece of legislation created by Congress in 1940. Enforced and regulated by the Securities Exchange Commission, the act clearly defines the limits regarding filings, service charges, financial disclosure and fiduciary duties of open-end mutual, exchange-traded and closed-end funds.
Managed Futures is an alternative investment strategy in which professional portfolio managers use futures contracts as part of their overall investment strategy. Managed futures provide portfolio diversification among various types of investment styles and asset classes to help mitigate portfolio risk in a way that may not be possible in direct equity investments. Professional money managers, known as commodity trading advisors, typically monitor managed futures accounts. These accounts can have various weights in stocks and derivative investments. A diversified managed futures account will generally have exposure to a number of markets such as commodities, energy, agriculture and currency. Introducing futures into a portfolio may help reduce risk because of the negative correlation between asset groups.
Margin-to-Equity Ratio is a minimum amount of funds that must be deposited as a performance bond by a customer with his broker and net value of an account as determined by combining the ledge balance with an unrealized gain or loss in open positions as marked to the market.
Market-Cap Weighting Strategy is a strategy that employs a stock market index weighted by the marketing capitalization if each stock in said index; larger companies account for a greater portion of the index.
Market Neutral Roll Arbitrage is an investment strategy that seeks to entirely avoid risk, typically by hedging. One way to employ this methodology is through the use of a rolling futures contract, which involves the buying and selling of futures contracts with different expiration dates.
Mean Reversion Models are trading models that assume prices will eventually return to a long-term average level.
Mean Reversion Strategies – same as mean reversion models
A Moving Average is an average of prices calculated over a window (e.g., 10 days), which is then rolled forward every day by dropping the oldest observation and adding the most recent one. A moving average model is a trading model that generates a buy (sell) signal when a shorter-term moving average of historical prices crosses a longer-term moving average of historical prices from below (above).
The MSCI® EAFE® Index (Europe, Australia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the US & Canada. As of May 2009, the MSCI EAFE Index consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
A Multi-Advisor Mutual Fund is a mutual fund (pooled investment vehicle under the Investment Company Act of 1940) that provides exposure to multiple investment strategies. It offers the potential to achieve broad diversification in one mutual fund investment.
A Nearby Futures Contract is when several futures contracts are considered, the contract with the closest settlement date is called the nearby futures contract. The next (or the “next out”) futures contract is the one that settles just after the nearby futures contract. The contract farthest away in time from settlement, is, in turn, called the most distant futures contract.
Non-Parametric Modeling is a method commonly used in statistics to model and analyze ordinal or nominal data with small sample sizes. Unlike parametric models, non-parametric 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.
An Option is a contract that gives the buyer (the owner) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date. The seller incurs a corresponding obligation to fulfill the transaction – that is to sell or buy – if the owner elects to "exercise" the option prior to expiration. The buyer pays a premium to the seller for this right. An option that conveys to the owner the right to buy something at a specific price is referred to as a call; an option that conveys the right of the owner to sell something at a specific price is referred to as a put. Both are commonly traded, but for clarity, the call option is more frequently discussed.
A Quantitative Trading Strategy (also known as Systematic) employs computer-driven, mathematical models to identify when to buy or sell an instrument according to rules determined before a trade is made, generally with little or no human intervention once a mathematical formula has been entered.
Pattern Recognition is defined as the categorization of input data into identifiable classes via the extraction of significant futures or attributes of the data from a background of irrelevant detail.
Relative-Value is a method of determining an asset's value that takes into account the value of similar assets. Calculations used to measure the relative value of stocks include the enterprise ratio and the price-to-earnings ratio.
Relative-Value Commodity Arbitrage refers to a type of strategy that seeks to exploit differing prices in the commodities markets based on the relative value of the investments or how they measure in terms of risk, liquidity, and return of one instrument relative to another.
A Roll/Rolling Futures Contract/Contract Roll refers to the selling (buying) an expiring long (short) futures contract and buying (selling) a longer-dated futures contract in order to continue to maintain exposure to the underlying commodity.
Roll Yield is the ratio between the price of the contract sold and the price of the contract bought, which is:
• A gain in backwardation market (market configuration where futures contract prices decrease as maturities get longer)
• A loss in contango market (market configuration where futures contract prices increase as maturities get longer)
A Round-Turn is a completed transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase. A round turn counts both the buy and sale as one event. In a typical exchange volume measurement, a one-contract trade would be counted as one round turn.
The Russell 2000 Index® consists of the smallest 2,000 securities in the Russell 3000® Index. This is the Frank Russell Company’s small capitalization index that is widely regarded in the industry as the premier measure of small capitalization stocks. The Russell 3000® Index is composed of the 3,000 largest U.S. securities, as determined by total market capitalization. Source: russell.com
The 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. Total return provides investors with price-plus-gross cash dividend return. Gross cash dividends are applied on the ex-date of the dividend. Source: standardandpoors.com.
The S&P GSCI® Crude Oil Index, a sub index of the S&P GSCI provides investors with a reliable and publicly available benchmark for investment performance in the crude oil commodity markets. The index is designed to be tradable, readily accessible to market participants, and cost efficient to implement. The S&P GSCI is widely recognized as the leading measure of general commodity price movements and inflation in the world economy. Source: sgindex.com.
The S&P GSCI® Total Return Index is widely recognized as the leading measure of general price movements and inflation in the world economy. It provides investors with a reliable ad publicly available benchmark for investment performance in the commodity markets, and is designed to be a “tradable” index. The index is calculated primarily on a world production-weighted basis and is comprised of the principal physical commodities that are the subject of active, liquid futures markets. Source: sgindex.com.
Sector specific strategies invest in a specific sector of the economy, such as energy or utilities. They come in many different flavors and can vary substantially in market capitalization, investment objective (i.e. growth and/or income) and class of securities within the portfolio.
The SGI Smart Market Neutral Commodity Index℠ was launched on July 23, 2009 by Societe Generale, and aims at absolute returns taking non-directional exposures in three main commodity sectors: agriculturals, metals and energy. The methodology looks for the best contract to roll (i.e., the one that generates the most interesting roll yield), and takes into account the seasonality effect on identified underlying commodities for its rolling strategy. The roll of the SG dynamic methodology follows an optimized roll timing in order to ensure liquidity and mitigate market impact. The investment strategy is then exposed to a Volatility Targeting Mechanism to keep the volatility level at or around 6%. Source: sgindex.com.
Sharpe Ratio is a risk-adjusted measure developed by William F. Sharpe, calculated using annualized standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe Ratio, the better the fund’s historical risk-adjusted performance (assumed risk-free rate is 0%)
Short-Term Excesses occur when prices temporarily move more than can be justified by models.
Short-Term, Global Macro is a global macro strategy (see above) that focuses on the short-term, (generally less than three months)
Short-Term Momentum (also known as Short-Term Trend-Following) is trend-following that focuses on the short-term (generally less than three months).
Short-Term Multi-Strategy refers to a futures trading methodology that generally holds its positions for less than three months. Trading decisions are based on multiple trading strategies that may include a trend-following methodology as well as pattern recognition, spread trading, discretionary, contrarian and/or other approaches.
A Single-Advisor Mutual Fund is a mutual fund (pooled investment vehicle under the Investment Company Act of 1940) that provides investors with exposure to an individual investment strategy or trading program.
Skew describes the asymmetry from the normal distribution in a set of statistical data. Skew can come in the form of “negative skewness” or “positive skewness”, depending on whether data points are skewed to the left (negative skew) or to the right (positive skew) of the data average.
Sortino Ratio is a ratio developed by Frank A. Sortino to differentiate between good and bad volatility in the Sharpe ratio. This differentiation of upward and downward volatility allows the calculation to provide a risk-adjusted measure of a security or fund’s performance without penalizing it for upward price changes. A minimum acceptable return of 0% has been used in the calculation.
Spot Price is the current price at which a particular security can be bought or sold at a specified time and place. A security’s spot price is regarded as the explicit value of the security at any given time in the marketplace.
Spread Traders simultaneously purchase of one security and sell a related security. Spread trades are usually executed with options or futures contracts, but other securities are sometimes used. They are executed to yield an overall net position whose value, called the spread, depends on the difference between the prices of the securities. Spread trades are executed to attempt to profit from the widening or narrowing of the spread, rather than from movement in the prices of the securities directly. Spreads are either “bought” or “sold” depending on whether the trade will profit from the widening or narrowing of the spread.
Structured Products are designed to facilitate highly customized risk-return objectives. The U.S. Securities and Exchange Commission (SEC) Rule 434 defines structured securities as "securities whose cash flow characteristics depend upon one or more indices or that have embedded forwards or options or securities where an investor's investment return and the issuer's payment obligations are contingent on, or highly sensitive to, changes in the value of underlying assets, indices, interest rates or cash flows."
Style Drift is the divergence of a mutual fund from its stated investment style or objective. Style drift occurs as a result of intentional portfolio investing decisions by management, a change of the fund's management or, in the case of stocks, a company's growth.
A Systematic Trading Strategy (also known as Quantitative) employs computer-driven, mathematical models to identify when to buy or sell an instrument according to rules determined before a trade is made, generally with little or no human intervention once a mathematical formula has been entered.
Technical Analysis is based on the theory that the study of the commodities markets themselves provides a means of anticipating the external factors that affect the supply and demand of a particular commodity in order to predict future prices. Technical analysis operates on the theory that market prices at any given point in time reflect all known factors affecting supply and demand for a particular commodity. Consequently, only a detailed analysis of, among other things, actual daily, weekly and monthly price fluctuations, volume variations and changes in open interest are of predictive value when determining the future course of price movements.
Tracking Error is a measure of how closely a portfolio follows the index to which it is benchmarked. The best measure is the root mean-square of the difference between the portfolio and index returns.
A Trend-Following Strategy seeks to capitalize on momentum or price trends across global asset classes by taking either long or short positions as a trend is underway. Price trends are created when investors are slow to act on new information or sell prematurely and hold on to losing investments too long. Price trends continue when investors continue to buy an investment that is going up in price or sell an investment that is going down in price.
Trend Plus is a strategy that is primarily trend-following but tends to use enhancements not generally used by pure trend-followers. Examples might include other models such as non-trend, mean-reversion, etc., or involve modifications of traditional trend-following techniques and models.
Turtle Trading/Traders is a nickname given to a group of traders who were a part of a 1983 experiment run by two famous commodity traders, Richard Dennis and Bill Eckhardt. The goal of the study was to prove whether being a great trader was a genetic predisposition or whether it could be taught.
UCITS stands for “Undertakings for Collective Investments in Transferable Securities”. UCITS provides a single European regulatory framework for an investment vehicle which means it is possible to market the vehicle across the EU without worrying which country it is domiciled in. Designed to enhance the single market while maintaining high levels of investor protection, UCITS funds provide investors with some assurance that certain regulatory and investor protection requirements have been met.
An Underwater Curve, or a drawdown, is the peak-to-trough decline during a specific record period of an investment, fund, or commodity. A drawdown is usually quoted as the percentage between the peak and the trough.
A Unit Investment Trust (UIT) is an exchange-traded mutual fund offering a fixed (unmanaged) portfolio of securities having a definite life. A UIT is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 and is classified as an investment company. UITs are assembled by a sponsor and sold through financial advisors to investors. A UIT portfolio may contain one of several different types of securities. The two main types are stock (equity) trusts and bond (fixed-income) trusts. Unlike a mutual fund, a UIT is created for a specific length of time and is a fixed portfolio, meaning that the UIT’s securities will not be sold or new ones bought, except in certain limited situations.
Volatility Expansion Methodology is a set of trading rules that generate buy or sell signals if there is a change in some measure of market volatility such as an increase in the daily trading range (high to low), or if the opening price gaps sharply up (or down) sharply.