Glossary of Terms


Absolute Returns

Absolute returns are a measure of the gain or loss on an investment portfolio expressed as a percentage of invested capital rather than relative to a benchmark.


A measure risk-adjusted performance. A higher alpha indicates a security has performed better than expected with its given beta (or volatility.) See Beta.

Alternative Investment

An investment product other than traditional investments such as stocks, bonds, cash or property.

Asset Class

Category of different investment types, such as stocks, bonds, real estate, cash, etc.


Backwardation exists when the futures price is below the current spot price. Market participants believe the spot price will be lower in the future than it is now; the opposite of Contango.

Barclays Systematic Traders Index*

An equal weighted composite of managed futures programs whose approach is at least 95% systematic. The performance of the index is net of management and incentive fees from the individual trading managers.

Managed futures investments are subject to risks, including illiquidity, lack of a secondary market, and the volatility of the underlying commodities or futures markets traded by a particular program.

*One cannot invest directly in an index.

Barclays US Aggregate Bond Index*

Provides a measure of the performance of the US investment grade bond market, which includes investment grade US Government bonds, investment grade corporate bonds, mortgage pass-through securities and asset-backed securities that are publicly offered for sale in the United States. The securities in the Index must have at least 1 year remaining to maturity. In addition, the securities must be denominated in US dollars and must be fixed rate, nonconvertible and taxable.

Bond investments are subject to risks, including: interest rate risk, call risk, credit risk and reinvestment risk. Bonds rated below investment grade may have speculative characteristics and present additional risks.

*One cannot invest directly in an index.

Bear Market (Bear/Bearish)

A market condition in which prices of securities are falling.


Measures a fund's sensitivity to market movements by comparing a fund's excess return (over a benchmark) to the market's excess return. By definition, the beta of the market is 1.00. For example, a beta that is lower than 1.00 would normally indicate that a fund's excess return is expected to be above the market's excess return in a down year and below in an up year. However, beta is a measure of historical volatility and cannot predict a fund's actual performance.

Board of Trade

The Chicago Board of Trade, or CBOT, is a commodity exchange established in 1848 that today trades in both agricultural and financial contracts. The CBOT originally traded only agricultural commodities such as wheat, corn and soybeans. Now, the CBOT offers options and futures contracts on a wide range of products including gold, silver, US Treasury bonds and energy.


A person who buys and sells goods or assets for others.

Bull Market (Bull/Bullish)

A market condition in which prices of securities are rising.

Call Option

A call option gives the option holder the right, but not the obligation, to buy a specific amount of an asset at the strike price. The seller of the call option (also called the “call writer”) must sell the asset at the strike price if the option holder exercises his option.

Cash Settlement

The buyer and seller agree to settle in cash (rather than delivery of the commodity).

Commodity Futures Trading Commission (CFTC)

The federal regulator for the futures markets in the United States is the CFTC.

Closed-End Fund

A continuously offered registered investment company that is not a mutual fund or an exchange-traded fund. They are publicly offered, but not listed on a securities exchange.


A reasonably homogeneous good or material bought and sold freely as an article of commerce. Commodities include agricultural products, fuels, and metals and are traded in bulk on a commodity exchange or spot market.

Commodity Exchange

Futures contract and options on futures contracts and certain physicals traded in the United States must, with limited exception, be executed on a commodity exchange designated by the CFTC.  Among the principal domestic exchanges are the Chicago Board of Trade, the Chicago Mercantile Exchange (including the International Monetary Market), the New York Cotton Exchange and the Commodity Exchange, Inc.

Commodity Pool

A private investment structure 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.

Commodity Pool Operator (CPO)

A commodity pool operator is an individual or organization that solicits or receives funds to use in the operation of a commodity pool, syndicate, investment trust, or other similar fund, specifically for trading in commodity interests.

Commodity Trading Advisor (CTA)

A commodity trading advisor is an individual or organization who is retained by a fund or individual client to provide advice and services related to trading in futures contracts, commodity options and/or swaps. They are responsible for the trading within managed futures accounts. A CTA follows a set of investment strategies utilizing futures contracts and options on futures contracts on a wide variety of physical goods such as agricultural products, forest products, metals, and energy, plus derivative contracts on financial instruments such as indices, bonds, and currencies.

Compound Return

The rate of return, usually expressed as a percentage, that represents the cumulative effect that a series of gains or losses have on an original amount of capital over a period of time. Compound returns are usually expressed in annual terms, meaning that the percentage number that is reported represents the annualized rate at which capital has compounded over time.


The market is said to be in contago when the futures price is greater than the current spot price; the opposite of Backwardation. The idea behind commodities market in contago is that market participants feel the spot price will be higher in the future than it is today. As a result, they are willing to pay more today through a futures contract to lock in a price, rather than gambling on a higher purchase price for the spot at maturity of the contract.


Correlation is a measure of the degree to which two variables relate to each other.


A derivative is a contract whose value depends upon the price of an underlying commodity, security or index.

Discretionary Trading

A discretionary trading strategy involves decisions made by a human being using real time data, rather than by a computer using a systematic approach.


Diversification is a portfolio strategy designed to reduce exposure to risk by combining a variety of investments. The goal of diversification is to reduce the risk in a portfolio. Volatility is limited by the fact that not all asset classes or industries or individual companies move up and down in value at the same time or at the same rate. Diversification reduces both the upside and downside potential and allows for more consistent performance under a wide range of economic conditions.


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.

Due Diligence

An investigation or audit of a potential investment. Due diligence serves to confirm all material facts both prior to an investment and on an ongoing basis after investing.

Electronic Trading System

Electronic trading, sometimes called etrading, is a method of trading securities (such as stocks, and bonds), foreign exchange or financial derivatives electronically. Information technology is used to bring together buyers and sellers through an electronic trading platform and network to create virtual market places such as NASDAQ, NYSE Arca and Globex which are also known as electronic communication networks (ECNs).


A marketplace in which securities, commodities, derivatives and other financial instruments are traded. The core function of an exchange — such as a stock exchange — is to ensure fair and orderly trading, as well as efficient dissemination of price information for any securities trading on that exchange. An exchange may be a physical location where traders meet to conduct business or an electronic platform.

Exchange Traded Fund (ETF)

ETFs combine features of an index fund and a stock traded on a major exchange.

Expiration Date

The last day that an options or futures contract is valid.

Futures Commission Merchant (FCM)

An individual or organization accepting orders to buy or sell futures or futures options. A FCM has a role in the futures market similar to that of a broker in the securities market. In addition to accepting buy or sell orders, FCM's can also hold their client's money or securities in margin accounts in accordance with the rules of the exchange on which they are trading.

Futures Industry Association (FIA)

An association of futures commission merchants, banks and trading advisors operating in the United States, European and Asian futures markets. FIA provides information and education on futures markets and trading. It also represents the interest of its members by lobbying regulatory bodies and exchanges.

Financial Industry Regulatory Authority (FINRA)

A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's regulation committee. FINRA is responsible for governing business between brokers, dealers and the investing public. By consolidating these two regulators, FINRA aims to eliminate regulatory overlap and cost inefficiencies.

Forward Contract

A forward contract is a contractual right to purchase or sell a commodity at or before a specified date in the futures at a specified price and, therefore is similar to a futures contract. However, unlike futures contracts, forward contracts are not traded on a designated exchange and historically have not contained standardized provisions such as those relating to term or quantity.

Fund of Hedge Funds

An investment vehicle that invests entirely in other funds. It may be described in a way that indicates what type of funds it invests in. For example, a fund of private equity funds probably invests its capital in only private equity funds. A growing class of fund of funds invests primarily in hedge funds. This type of fund of funds is usually called a fund of hedge funds. Such a fund may have a much smaller minimum investment than the typical hedge fund, opening the door to this type of alternative investment to a much larger pool of investors.

Futures Contract

Futures contracts are standardized contracts traded on domestic or foreign future exchanges, which call for the future delivery of specified quantities of a physical commodity or financial asset on a specified date. Futures contracts may be settled by physical delivery or cash settlement.

Hedge Fund

An managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Most hedge funds are often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they sometimes require investors keep their money in the fund for at least one year.


A protective procedure designed to reduce losses that may arise because of price fluctuations in an asset.

HFRI Fund of Funds Composite Index*

HFRI Fund of Funds Composite Index is currently comprised of over 500 domestic and offshore funds of hedge funds that have a minimum of $50 million under management or a 12-month track record of active performance. All fund performance is equally weighted and is net of all fee returns on a monthly basis. The current month and the prior three months returns of the Index are estimates and are subject to change. All performance prior to that is locked and is no longer subject to change.

Investments in hedge funds involve the risk of (i) loss of all or a substantial portion of the investment due to leveraging, short-selling, or other speculative practices of hedge funds, (ii) lack of liquidity of their shares, (iii) volatility of returns, (iv) limited information regarding valuations and pricing, and (v) complex tax structures and delays in tax reporting. Hedge funds are generally subject to less regulation and higher fees than mutual funds.

*One cannot invest directly in an index.

HFRI Fund Weighted Composite Index*

The HFRI Fund Weighted Composite Index is a global, equal-weighted index of over 2,000 single-manager hedge funds that report to the HFR Database. Constituent funds report monthly performance net of all fees in US dollars and have a minimum of $50 million under management or a 12-month track record of active performance. The HFRI Fund Weighted Composite Index does not include funds of hedge funds. The current month and the prior three months returns of the Index are estimates and are subject to change. All performance prior to that is locked and is no longer subject to change.

Investments in hedge funds involve the risk of (i) loss of all or a substantial portion of the investment due to leveraging, short-selling, or other speculative practices of hedge funds, (ii) lack of liquidity of their shares, (iii) volatility of returns, (iv) limited information regarding valuations and pricing, and (v) complex tax structures and delays in tax reporting. Hedge funds are generally subject to less regulation and higher fees than mutual funds.

*One cannot invest directly in an index.

Incentive Fee

An incentive fee or performance fee is a fee that an investment fund may be charged by the investment manager that manages its assets, calculated by reference to the net profits achieved by the fund’s investments. Performance fees are widely used by the investment managers of hedge funds, which typically charge a performance fee of 20% of the net profits of the fund.

Interest Rate Future

A financial derivative (a futures contract) with an interest-bearing instrument as the underlying asset. It is a particular type of interest rate derivative.

Junk Bond

High-yield or non-investment grade bond. Junk bonds are fixed-income instruments that carry a rating of ‘BB’ or lower by Standard & Poor’s, or ‘Ba’ or below by Moody’s. Junk bonds are so called because of their higher default risk in relation to investment-grade bonds.


A tax document used to report the incomes, losses and dividends of a business’s partners or S corporation’s shareholders. Rather than being a financial summary for the entire group, the Schedule K-1 document is prepared for each partner or shareholder individually.


The use of various financial instruments or borrowed capital, such as margin, to increase the risk and the potential return of an investment.


The ability to convert an asset to cash quickly. Also known as “marketability.”

Lock Up

A hard lock up would prevent an investor from withdrawing capital from a fund before the expiration of the lock up period. Soft lock ups allow for a withdrawal upon payment of penalty prior to the expiration of a lock up period.


A position that will profit from an increase in a security’s price.

Managed Account

An account for which the holder gives his/her broker or someone else the authority to buy and sell securities, either absolutely or subject to certain restrictions. Also called a controlled account or discretionary account.

Managed Futures

A form of alternative investment that takes long and short positions in futures contracts, currency forward contracts, government securities, and options on futures contracts. Managed futures are operated by licensed Commodity Trading Advisors, or CTAs, who are regulated in the United States by the Commodity Futures Trading Commission and the National Futures Association, or NFA.

Management Fee

A charge levied by an investment manager 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.

Mean Reversion

A theory suggesting that prices and returns eventually move back towards the historical average.

Managed Funds Association (MFA)

The trade association for the managed funds industry.


The rate of increase or decrease of a security’s price or volume. The idea of momentum in securities is that their price may be more likely to keep moving in the same direction than to change direction. In technical analysis, momentum is used to help identify trend lines.

Morgan Stanley Capital International Europe, Australasia, Far East Index (MSCI EAFE Index)*

A capitalization-weighted index that is designed to measure the investment returns of developed economies outside of North America. The Index includes publicly traded stocks from 21 countries.

International investments may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.

*One cannot invest directly in an index.

Mutual Fund

An investment vehicle that is made up of a pool of capital collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.

National Association of Real Estate Investment Trusts All REITs Index*

An unmanaged total return index designed to measure the growth and performance of the real estate investment trust (REIT) industry. The index includes all REITs currently trading on the New York Stock Exchange, the NASDAQ National Market System and the American Stock Exchange.

REITs are subject to risks similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited diversification and sensitivity to economic factors such as interest rate changes and market recessions.

*One cannot invest directly in an index.

Net Asset Value

The dollar value of a single fund share, based on the value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding. Calculated at the end of each business day.

Net Performance

An increase or decrease in net asset value exclusive of additions, withdrawals and redemptions.

National Futures Association (NFA)

National Futures Association (NFA) is the industry wide self-regulatory organization for the US futures industry. NFA's mission is to ensure futures industry integrity, protect market participants and help its members meet their regulatory responsibilities. The NFA is overseen by the Commodity Futures Trading Commission (CFTC), the government agency responsible for regulating the US futures industry.

National Introducing Brokers Association (NIBA)

A trade organization that represents professionals working in the futures and options business. Members of the National Introducing Brokers Association or NIBA include introducing brokers or IBs, commodity trading advisors or CTAs, futures commission merchants or FCMs, and futures and options exchanges, as well as others who provide resources to the industry.

New York Stock Exchange (NYSE)

Located in New York City, the New York Stock Exchange is the oldest and largest stock exchange in the United States.


The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt instrument, at a specified price (the strike price) during a specified period of time.

Over-the-Counter Market (OTC)

A market for securities made up of securities dealers who may or may not be members of a securities exchange. This market is a negotiated market rather than an auction market such as the NYSE.

Pattern Recognition

Employs quantitative methods to analyze price data in search of statistical anomalies, which may have the potential to be traded profitably. May also utilize technical analysis of chart patterns.

Physical Delivery

The seller delivers the underlying asset (e.g., currencies, commodities, or securities) to the buyer at the pre-agreed price.


A commitment, either long or short, in the market.

Position Limits

The CFTC and United States commodity exchanges have established limits, referred to as "speculative position limits" or "position limits," on the maximum net long or net short speculative position which any person or group of persons may hold, own, or control in futures contracts or options on particular commodities.

Private Placement

Sale of an entire issue of a security to a small group of investors who undertake not to resell it within a specified period. In the US, if the sale is made to less than 35 investors, it is exempt from Securities and Exchange Commission (SEC) registration requirements.


The official selling circular that must be given to purchasers of new securities registered with the Securities and Exchange Commission. It highlights the much longer Registration Statement filed with the SEC. It warns that the issue has not been approved (or disapproved) by the SEC and discloses such material information as the issuer's property and business, the nature of the security offered, management's experience, and history.

Put Option

A put option gives the option holder the right, but not the obligation, to sell a specific amount of an asset at the strike price. The seller of the put option (also called the “put writer”) must buy the asset at the strike price if the option holder exercises his option.

Return/Risk Ratio

A simple calculation meant to illustrate the amount of return achieved per unit of risk. It is derived by dividing the average annual return by the standard deviation of an investment. A higher number tends to signify a better return/risk relationship, whereas a lower number may be seen as unfavorable.

Securities and Exchange Commission (SEC)

The Securities and Exchange Commission, established by Congress to help protect investors, administers the Securities Act of 1933, the Securities Exchange Act of 1934, as well as the Investment Company Act, among others.

Segregated Account

Funds that customers deposit with an FCM, or that are otherwise required to be held for the benefit of customers, to margin futures and options on futures contracts traded on futures markets located in the US, i.e., designated contract markets, are held in a customer segregated funds account in accordance with section 4d(a)(2) of the Commodity Exchange Act (Act) and CFTC Rule 1.20. Customer funds held in the customer segregated funds account may not be used to meet the obligations of the FCM or any other person, including another customer.

Settlement Price

The settlement price is the price at which the last trade occurred during the trading session. Settlement prices are used to determine open trade equity, margin calls and invoice prices for deliveries.

Sharpe Ratio

A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate — such as that of the 10-year US Treasury bond — from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.


A position that will profit from a decrease in a security's price.

Standard & Poor’s 500 Total Return Index*

The 500 stocks in the S&P 500 are chosen by Standard and Poor’s based on market size, industry representation, liquidity and stability. The stocks in the S&P 500 are not the 500 largest companies; rather the Index is designed to be a leading indicator of US equities and is meant to capture the returns of many different sectors of the US economy.

US equity index investments are subject to risks, including price fluctuations in response to news on companies, industries, government policies and the general economic environment.

*One cannot invest directly in an index.

S&P GSCI© Total Return Index*

A composite index of commodity sector returns representing a broadly diversified, unleveraged, long-only investment in commodity futures. The returns are calculated on a fully collateralized basis with full reinvestment.

Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

*One cannot invest directly in an index.


A speculator rarely takes delivery of commodities but close out their positions by entering into offsetting purchase or sales of contracts. Since speculators may take either a long or short position in the commodities market, it is possible for him to make profits or incur losses regardless of whether prices go up or down.

Standard Deviation

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.

Systematic Trading

Also known as mechanical trading, is a way of defining trade goals, risk controls and rules that can execute trade orders in a methodical way. Systematic Trading is often associated with the usage of computer models, mainly based on technical analysis of market data or fundamental economic data, to identify and make trades, with limited manager intervention. The opposite is discretionary trading.

Technical Analysis

A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysis uses charts and other tools to identify patterns that can suggest future activity.


The minimum upward or downward movement in the price of a security. The term "tick" also refers to the change in the price of a security from trade to trade.

Treasury Inflation Protected Securities (TIPs)

Inflation-indexed bonds issued by the US Treasury. The principal is adjusted to the Consumer Price Index (CPI), the commonly used measure of inflation. When the CPI rises, the principal adjusts upward. If the index falls, the principal adjusts downwards. The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal, thus protecting the holder against the official inflation rate.

Trade Date

Day on which a transaction is executed.


The extent to which investors have ready access to view the portfolio holdings of a fund.

Trend Following Strategy

Trend following is an investment strategy based on the technical analysis of market prices, rather than on the fundamental strengths of the securities or markets. It tries to take advantage of long, medium and short-term moves that seem to play out in various financial markets. The strategy aims to work on the market trend mechanism and is intended to be capable of making profits from both the ups and downs of the markets.

VIX® (CBOE Volatility Index®)*

The VIX index measures investor expectations for the volatility of the S&P 500 over the next 30 days, as implied by current S&P 500 options prices. Inception: 1/1990

*One cannot invest directly in an index.


The relative rate at which the price of a security moves up and down.


Long-term certificate issued by a firm giving the holder the right to purchase its securities at a stipulated price (exercise price) in the future. Warrants are negotiable instruments that usually serve to enhance the marketability of corporate bonds or preferred stock.


The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value.