Glossary

Refers to the use of a human element - such as a single manager, co-managers, or a team of managers - to actively manage a fund´s portfolio. Active managers rely on analytical research, forecasts and their own judgment and experience in making investment decisions on what securities to buy, hold and sell. The opposite of active management is called passive management, better known as indexing. Investors who believe in active management do not follow the efficient market hypothesis. They believe it is possible to profit from the stock market through any number of strategies that aim to identify mispriced securities. Investment companies (fund sponsors) who believe it possible to outperform the market employ professional investment managers to manage one or more of the company´s mutual funds. The objective with active management is to produce better returns than those of passively managed index funds. For example, if you are a large-cap stock fund manager, you wa nt to beat the performance of the Standard & Poor´s 500 Index. Unfortunately, for a large majority of active managers, this has been "mission impossible." This phenomenon is simply a reflection of how hard it is, no matter how smart the manager, to beat the market.

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 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).

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.

A type of risk that a fund or 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.

The policy under which all futures positions owned or controlled by one trader or a group of traders are combined to determine reportable positions and speculative limits

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.

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.

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. In the field of asset management, the essential defining features of alternative investments are: the pursuit of absolute returns. That is:

• The quest to achieve a positive return regardless of whether asset prices are rising or falling.
• Freedom to trade in a wide range of assets and instruments employing a variety of styles and investment techniques in diverse markets.
• Reliance on the investment manager´s skill and application of a clear investment process to exploit market inefficiencies and opportunities with identifiable and understandable causes and origins.

Alternative investment managers may take advantage of pricing anomalies between related securities, 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.

A statistical analysis tool that separates the total variability found within a dataset into two components, random and systematic factors. The random factors do not have any statistical influence on the given dataset, while the systematic factors do. The ANOVA test is used to determine the impact independent variables have on the dependent variable in a regression analysis. The ANOVA test is the initial step in identifying factors that are influencing a given data set. After the ANOVA test is performed, the analyst is able to perform further analysis on the systematic factors that are statistically contributing to the data set´s variability. ANOVA test results can then be used in an F-test on the significance of the regression formula overall.

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.

The technique of exploiting pricing anomalies between related securities 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.

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.

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.

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

A percentage figure used when reporting the historical return, such as the three-, five- and 10-year average returns of a mutual fund. The average annual return is stated net of a fund´s operating expense ratio, which does not include sales charges, if applicable, or portfolio transaction brokerage commissions When you are selecting a mutual fund, the average annual return is a helpful guide for measuring a fund´s long-term performance. However, investors should also look at a fund´s yearly performance to fully appreciate the consistency of its annual total returns. For example, a five-year average annual return of 10% looks attractive; however, if the yearly returns (those that produced the average annual return) were +40%, +30%, -10%, +5% and -15% (50 / 5 = 10%), the fund´s recent performance (past three years) is quite poor.

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

A fee (sales charge or load) that investors pay when selling mutual fund shares within a specified number of years, which usually ranges between five to ten years. The fee amounts to a percentage of the value of the share being sold. The fee percentage is highest in the first year and decreases yearly until the specified holding period ends, at which time it drops to zero. Also known as a "contingent deferred sales charge or load" The back-end load is a type of sales charge that is used with mutual funds that have share classes, which in this case are identified as Class B shares. Class A shares charge a front-end load that is taken from an investor´s initial investment. Class C shares are considered to be a type of level-load fund - no front-end and low back-end loads, but the fund´s operating expenses are high. In all cases, the load is paid to a financial intermediary, and is not included in a fund´s operating expenses. In essence, funds with share classes carry sales charges (as opposed to no-load funds). The class you choose is what determines how much and when you pay them. In employer-sponsored retirement plans, the loads are generally waived.

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

This ratio was developed by Barclay Trading Group, Ltd. In simplest terms the Barclay Ratio is equal to the trend of the VAMI divided by the standard deviation of the monthly returns. Although similar in certain respects to the Sharpe Ratio, it has a much higher correlation with percentage of profitable 12-month time windows than any other reward/risk ratio.

This ratio was developed by Barclay Trading Group, Ltd. In simplest terms the Barclay Ratio is equal to the trend of the VAMI divided by the standard deviation of the monthly returns. Although similar in certain respects to the Sharpe Ratio, it has a much higher correlation with percentage of profitable 12-month time windows than any other reward/risk ratio.

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

A standard against which the performance of a security mutual fund or 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 and the Lehman Brothers Aggregate Bond Index.

A measure of how sensitive an investment portfolio is to market movements. The sign of the beta (+/-) indicates whether, on average, the portfolio´s returns move in line with the market (+), or in the opposite direction (-) to the market. If the beta of a portfolio relative to a benchmark index is equal to +1, then the returns on the portfolio follow those of the index. By definition, the beta of that benchmark index is +1. A portfolio with a beta greater than +1 tends to amplify the overall movements of the market, while a portfolio with a beta between 0 and +1 tends to move in the same direction as the market but not to the same extent. A portfolio with a beta of -1 tends to move in the opposite direction to the market.

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.

A ratio used to determine returns relative to drawdown´s (downside) risk in a hedge fund or 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 funds 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.

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.

An investment vehicle offered by certain institutions that guarantees the investor´s initial capital investment from any losses. Even though these products prevent investors from losing their invested capital, they also limit the amount of return that investors can obtain if the investments appreciate. This is how the offering institutions can afford to guarantee the principal investment.

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

A rate of return commonly used in real-estate transactions. The calculation determines the cash income on the cash invested: Cash on Cash returns equal the annual dollar income divided by the total dollar investment.