Glossary

The process by which a clearinghouse maintains records of all trades and settles margin flow on a daily mark-to-market basis for its clearing members.

An agency or separate corporation of a futures exchange that is responsible for settling trading accounts, collecting and maintaining margin monies, regulating delivery and reporting trade data. The clearinghouse becomes the buyer to each seller (and the seller to each buyer) and assumes responsibility for protecting buyers and sellers from financial loss by assuring performance on each contract.

A member of an exchange clearinghouse responsible for the financial commitments of its customers. All trades of a non-clearing member must be registered and eventually settled through a clearing member.

An investment approach that places securities into groups based on the correlation found among their returns. Securities with high positive correlations are grouped together and segregated from those with negative correlation. Between each cluster, very little correlation should exist. Holding stocks in each cluster provides the investor with a diversified portfolio. Cluster analysis enables the investor to eliminate any overlap in his or her portfolio by identifying securities with related returns. This approach increases diversification, which provides the investor will a less risky portfolio. Cluster analysis has uncovered certain categories of stocks such as cyclical and growth stocks.

The compounded ´growth´ of an investment that has been achieved each year to enable the initial price to grow to the latest selected price over a particular time period.

The federal regulatory agency established in 1974 that administers the Commodity Exchange Act. The CFTC monitors the futures and options on futures markets in the United States.

An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures or options contracts. The concept is similar to a mutual fund in the securities industry. Also referred to as a Pool.

An individual or organization which operates or solicits funds for a commodity pool. A CPO is generally required to be registered with the CFTC.

The manager or adviser of a managed futures fund. The term reflects the fact that early futures markets were commodities-based and were set up to enable producers and buyers to hedge against possible price movements in the underlying asset.

The act of making a process, good or service easy to obtain by making it as uniform, plentiful and affordable as possible. Something becomes commoditized when one offering is nearly indistinguishable from another. As a result of technological innovation, broad-based education and frequent iteration, goods and services become commoditized and, therefore, widely accessible. In the past few decades, previously "modern" things such as microchips, personal computers - even the internet itself - have become essentially commoditized. Combinations of commoditized products such as computers and business software have in effect commoditized many processes, such as business accounting and supply chain management. In a truly capitalist society, the ability to commoditize anything is seen as a benefit to all, and opens up resources that can be put to better use on innovative enterprises.

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.

The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings

A risk assessment technique often used to reduce the probability a portfolio will incur large losses. This is performed by assessing the likelihood (at a specific confidence level) that a specific loss will exceed the value at risk. Mathematically speaking, CVaR is derived by taking a weighted average between the value at risk and losses exceeding the value at risk. This term is also known as "Mean Excess Loss", "Mean Shortfall" and "Tail VaR. Conditional Value at Risk was created to be an extension of Value at Risk (VaR). The VaR model does allow managers to limit the likelihood of incurring losses caused by certain types of risk - but not all risks. The problem with relying solely on the VaR model is that the scope of risk assessed is limited, since the tail end of the distribution of loss is not typically assessed. Therefore, if losses are incurred, the amount of the losses will be substantial in value.

A strategy that synthetically reproduces the pay-out of a put or call option through dynamically adjusting the delta hedge of the underlying asset. Unlike a conventional option, the investment exposure (or participation) of the underlying asset will change over the life of the structure.

A futures market in which prices in succeeding delivery months are progressively higher. The opposite of Backwardation.

Convertible Arbitrage involves purchasing a portfolio of convertible securities, generally convertible bonds, and hedging a portion of the equity risk by selling short the underlying common stock. Certain managers may also seek to hedge interest rate exposure under some circumstances. Most managers employ some degree of leverage ranging from zero to 6:1. The equity hedge ratio may range from 30 to 100 percent. The average grade of bond in a typical portfolio is BB-, with individual ratings ranging from AA to CCC. However, as the default risk of the company is hedged by shorting the underlying common stock, the risk is considerably better than the unhedged bond´s rating indicates.

A bond issued by a company that has a set maturity date and pays interest in the form of a coupon. It has features of both a bond and stock and its valuation reflects both types of instrument. It gives the holder the option to convert the bond into a specific number of shares of the issuing company - in other words, it has an ´embedded option´.

Correlation is a measure of the interdependence or strength of the relationship between two investments. It tells us something about the degree to which the variations of returns from their respective means move together. So if two investments are positively correlated, when one performs above its mean return it is likely that the other will also perform above its own mean return. If two investments are negatively correlated, when one performs above its mean return it is likely that the other will perform below its mean return. Note that correlation says nothing about the mean returns themselves - they could both be up, or both down, or one could be up and one down. To measure the strength of the relationship, we use the correlation coefficient. Values range from -1 (perfect negative correlation), through 0 (no correlation or uncorrelated) to +1 (perfect positive correlation). From a risk management perspective, it is generally favorable if two investments are uncorrelated because it means that there is no identifiable directional pattern or proportional relationship between the deviations of their monthly returns from each of their respective trends - sometimes investment B is positively correlated to investment A when the returns of A are positive and negatively correlated when they are negative, meaning that over a period of time our strategy returns get closer to non-correlation. This produces a smoother overall return profile.

A measure that determines the degree to which two variable´s movements are associated. The correlation coefficient will vary from -1 to +1. A -1 indicates perfect negative correlation, and +1 indicates perfect positive correlation.

A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means returns move inversely. One method of calculating covariance is by looking at return surprises (deviations from expected return) in each scenario. Another method is to multiply the correlation between the two variables by the standard deviation of each variable.

A short call or put option position which is covered by the sale or purchase of the underlying futures contract or physical commodity.

Hedging a cash commodity using a different but related futures contract when there is no futures contract for the cash commodity being hedged and the cash and futures market follow similar price trends (e.g., using soybean meal futures to hedge fish meal).

A statistical measure timing the movements and proximity of alignment between two different information sets of a series of information. Cross correlation is generally used when measuring information between two different time series. The range of the data is -1 to 1 such that the closer the cross-correlation value is to 1, the more closely the information sets are.

The aggregate amount that an investment has gained or lost over time, independent of the period of time involved. Presented as a percentage, the cumulative return is the raw mathematical return of the following calculation, Current price of Asset minus Original price of Asset divided by the Original price of Asset.

A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. To counter deflation, the Federal Reserve (the Fed) can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because businesses increase profits and take some of the depressive pressures off wages and debtors of every kind.

The sensitivity of an option price to moves in the price of the underlying asset.

A financial instrument, traded on or off an exchange, the price of which is directly dependent upon the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement. Derivatives involve the trading of rights or obligations based on the underlying product but do not directly transfer property. They are used to hedge risk or to exchange a floating rate of return for a fixed rate of return.

When a Futures Commission Merchant (FCM) is a member of more than one Self-Regulatory Organization (SRO), the SROs may decide among themselves which of them will be primarily responsible for enforcing minimum financial and sales practice requirements. The SRO will be appointed DSRO for that particular FCM. NFA is the DSRO for all non-exchange member FCMs.

The statement that must be provided to prospective customers that describes trading strategy, fees, performance, etc.