# INDUSTRY DEFINITIONS

Below you will find a list of the most commonly used Industry Definitions for your use. If for whatever reason we have neglected to list one that interests you please send us a comment and we will add it to the list.

- Calmar Ratio = Compound Annualized ROR ÷ ABS (Maximum Drawdown)

A person engaged in a business similar to an investment trust or a syndicate and who solicits or accepts funds, securities, or property for the purpose of trading commodity futures contracts or commodity options. The commodity pool operator either itself makes trading decisions on behalf of the pool or engages a commodity trading advisor to do so.

[accordion_group title="Commodity Trader Advisor (CTA)"]A person who, for pay, regularly engages in the business of advising others as to the value of commodity futures or options or the advisability of trading in commodity futures or options, or issues analyses or reports concerning commodity futures or options.

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.

**Formula:** ((Final VAMI ÷ Initial VAMI) ^ (1 ÷ number of years)) – 1 (X 100 for %)

- If you don’t have an even number of years, use (12 / number of months)

The Drawdown Report presents data on the percentage drawdowns during the trading program’s performance history ranked in order of magnitude of loss.

- Depth: Percentage loss from peak to valley
- Length: Duration of drawdown in months from peak to valley
- Recovery: Number of months from valley to new high
- Start Date: Month in which peak occurs.
- End Date: Month in which valley occurs.

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

- If there are fewer than four data points, or the sample standard deviation equals zero, Kurtosis returns the N/A error value.

Represents the amount of trading capital that is being held as margin at any particular time. The low margin requirements of futures results in substantial leverage of the investment. However, the exchanges require a minimum amount that varies depending on the contract and the trader. The broker may set the requirement higher, but may not set it lower. A trader, of course, can set it above that, if he does not want to be subject to margin calls.

An individual who meets requirements to trade in different investment funds, such as futures and hedge funds. The rules for defining a QEP are outlined under Rule 4.7 of the Commodity and Exchange Act.

Some of the conditions that a person must meet in order to be classified as a QEP are:

- Must own securities and other investments with a market value of at least $2,000,000.
- Has or has had an account open with a futures commisssion merchant at any time during the preceding six month period (along with $200,000 or more initial margin and option premiums for commodity interest transactions).
- Has a combined portfolio of the investments specified in the two requirements above.

A return/risk measure developed by William Sharpe. Return (numerator) is defined as the incremental average return of an investment over the risk free rate. Risk (denominator) is defined as the standard deviation of the investment returns. Alpha Designed defines the value for the risk free rate as 50bp.

- Annualized Sharpe = Monthly Sharpe x (12)½

Describe asymmetry from the normal distribution in a set of statistical data. Skewness 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.

- If there are fewer than three data points, or the sample standard deviation is zero, Skewness returns the N/A error value.

This is a return/risk ratio developed by Frank Sortino. Return (numerator) is defined as the incremental compound average period return over a Minimum Acceptable Return (MAR). Risk (denominator) is defined as the Downside Deviation below a Minimum Acceptable Return (MAR). Just as with the Downside Deviation calculation, Alpha Designed calculates the Sortino using 3 different values for the MAR: 1) a MAR defined as 10.0%, 2) a MAR defined as 5.0%, and 3) a MAR defined as 0.0%.

- Annualized Sortino = Monthly Sortino x (12)½

Standard Deviation measures the dispersal or uncertainty in a random variable (in this case, investment returns). It measures the degree of variation of returns around the mean (average) return. The higher the volatility of the investment returns, the higher the standard deviation will be. For this reason, standard deviation is often used as a measure of investment risk.

- Annualized Standard Deviation = Monthly Standard Deviation X (12)½

This is a return/risk ratio. Return (numerator) is defined as the Compound Annualized Rate of Return over the last 3 years. Risk (denominator) is defined as the Average Yearly Maximum Drawdown over the last 3 years less an arbitrary 10%. To calculate this average yearly drawdown, the latest 3 years (36 months) is divided into 3 separate 12-month periods and the maximum drawdown is calculated for each. Then these 3 drawdowns are averaged to produce the Average Yearly Maximum Drawdown for the 3 year period. If three years of data are not available, the available data is used.

- Where D1 = Maximum Drawdown for first 12 months
- Where D2 = Maximum Drawdown for next 12 months
- Where D3 = Maximum Drawdown for latest 12 months
- Average Drawdown = ( D1 + D2 + D3 ) ÷ 3
- Sterling Ratio = (Compound Annual RoR / (Average Annual Drawdown – 10%))