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.

Represents the average commission rate of the composite track record. A higher or lower commission rate would increase or decrease the performance accordingly.

This is a simple average return which is calculated by summing the returns for each period and dividing the total by the number of periods. The simple average does not take the compounding effect of investment returns into account.

This is a simple average of the periods with a gain. It is calculated by summing the returns for gain periods (return = 0) and then dividing the total by the number of gain periods.

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 Maximum Drawdown over the last 3 years. If three years of data are not available, the available data is used. ABS is the Absolute Value.

  • 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.

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)

Correlation is a measure of the interdependence between two investments. Correlation conveys to us the degree to which the variations of returns from their respective means move together. Hence, if two investments are positively correlated, when one performs well the other should perform well. If two investments are negatively correlated, when one performs well the other should perform the opposite or poorly. Correlation coefficients are measured and assigned scores of between + 1.0 and -1.0. A +1.0 is a perfect positive correlation. A -1.0 is a perfect negative correlation.

Method of trading that relies on subjective (human) entry/exit criteria.

Similar to the loss standard deviation except the downside deviation considers only returns that fall below a defined Minimum Acceptable Return (MAR) rather than the arithmetic mean. For example, if the MAR is assumed to be 5.0%, the downside deviation would measure the variation of each period that falls below 5.0%. (The loss standard deviation, on the other hand, would take only losing periods, calculate an average return for the losing periods, and then measure the variation between each losing return and the losing return average). IASG uses 3 downside deviation calculations, each using a different value for the MAR: 1) Uses a MAR defined as 10.0% 2) Uses a MAR defined as 5.0% 3) a MAR defined as 0.0%.

Defined as the greatest cumulative percentage decline in net asset value due to losses sustained by the trading program during the year in which the initial net asset value is not equaled or exceeded by a subsequent asset value.

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.

Individuals, associations, partnerships, corporations, and trusts that solicit or accept orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any exchange and that accept payment from or extend credit to those whose orders are accepted.

Similar to standard deviation, except this statistic calculates an average (mean) return for only the periods with a gain and then measures the variation of only the gain periods around this gain mean. This statistic measures the volatility of upside performance.

Commodity trading advisors that trade the markets from a fundamental approach will often look at crop reports, weather patterns, economic reports and other fundamental data to determine whether to trade.

A trader who enters into positions in a futures market opposite to positions held in the cash market to minimize the risk of financial loss from an adverse price change; or who purchases or sells futures as a temporary substitute for a cash transaction that will occur later. One can hedge either a long cash market position (e.g., one owns the cash commodity) or a short cash market position (e.g., one plans on buying the cash commodity in the future).

A requirement that the fund 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.

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.

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

Similar to standard deviation, except this statistic calculates an average (mean) return for only the periods with a loss and then measures the variation of only the losing periods around this loss mean. This statistic measures the volatility of downside performance.

A charge levied by a trading advisor for managing an investment fund. The management fee is intended to compensate the managers for their time and expertise. It can also include other items such as investor relations expenses and the administration costs of the fund.

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.

A type of fee that gives a portion of the returns of a fund or investment to the manager as a reward for positive performance. The fee is generally a percentage of the profits made on the investments. This type of fee is designed to reward managers for increasing the value of a portfolio, since investors will see value only when the portfolio grows.

Performance where more than 50% of the beneficial interest is owned by the firm, its affiliate, family member or any person providing services to the account. Proprietary Performance must be disclosed separately from customer performance.

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.

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

Measures the frequency with which a trading advisor initiates and subsequently closes out a market position on an average million-dollar account.

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%))

A method of trading which follows a mechanical set of rules, normally using computer models, producing entry and exit orders to form trading decisions.

The expected worst drawdown a CTA can expect in the program.

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.

The greatest cumulative percentage decline in month-end net asset value due to losses sustained by a pool, account or trading program during any period in which the initial month-end net asset value is not equaled or exceeded by a subsequent month-end net asset value. Such decline must be expressed as a percentage of the initial month-end net asset value, together with an indication of the months and year(s) of such decline from the initial month-end net asset value to the lowest month-end net asset value of such decline.