Altegris Glossary

Featured Term

Correlation

Definition:

A statistical measure of how two securities move in relation to each other. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random.

Review common phrases and terminology used in the world of alternative investments.

Absolute Return

The return that an asset achieves over a certain period of time. This measure looks at the appreciation or depreciation (expressed as a percentage) that an asset – usually a stock or mutual fund – achieves over a given period of time. It is concerned with the return of a particular asset and does not compare it to any other measure or benchmark.

Accredited Investor

As defined in Rule 501(a) of Regulation D promulgated under the 1933 Act. An "accredited investor" includes a natural person with a net worth (or a joint net worth with that person's spouse), excluding the value of such natural person’s primary residence, in excess of $1 million, or income in excess of $200,000 (or joint income with the investor’s spouse in excess of $300,000) in each of the two preceding years and has a reasonable expectation of reaching the same income level in the current year; and certain legal entities with total assets exceeding $5 million.

Alpha

A measure of performance on a risk-adjusted basis. Alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.

Altegris 40 Index®

The Altegris 40 Index is a dollar-weighted index that tracks the performance of the 40 leading managed futures programs by ending monthly equity for the previous month as reported to Altegris Analytics.

Arbitrage

The simultaneous purchase and sale of similar commodities in different markets to take advantage of a price discrepancy.

Asset Allocation

The process of dividing an investment portfolio among different kinds of assets to optimize the risk/reward tradeoff based on an individual’s or institution’s specific situation, goals and time horizon.

Asset Classes

A group of investments that have similar characteristics and behavior in the marketplace. Types of asset classes include stocks, bonds, cash and real estate.

At-the-Money Option

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

Backwardation

A futures market condition when a commodity trades at a higher price the closer to its expiration or maturity; the opposite of Contango.

Bear Market (Bear/Bearish)

A market in which prices are declining. A market participant who believes prices will move lower is called a “bear.” A news item is considered bearish if it is expected to result in lower prices.

Beta

A measure of volatility that reflects the tendency of a security’s returns and how it responds to swings in the markets. A beta of 1 indicates that the security’s price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market.

Board of Trade

A commodities exchange.

Broker

A company or individual that executes futures and options orders on behalf of financial and commercial institutions and/or the general public.

Bull Market (Bull/Bullish)

A market in which prices are rising. A market participant who believes prices will move higher is called a “bull.” A news item is considered bullish if it is expected to result in higher prices.

Buyout

Buyout funds seek to acquire private and public companies, as well as divisions of larger companies, and reposition them for sale at a multiple of invested equity by enhancing the value of the portfolio company.

Call Option

An option that 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.

Capital Call

Private equity funds issue capital calls to investors (limited partners) when a portion of their committed capital is needed to fund investments.

Cash Drag

Cash drag in regards to a primary offering refers to the fact that a primary investment is typically required to initially fund only a small percentage of its total capital commitment. This initial funding may be followed by subsequent drawdowns (the timing and size of which will vary and often come with short notice) as needed to make new investments. The investor may hold cash uninvested in order to have it on hand to satisfy later drawdowns, which can result in a drag on performance.

Cash Settlement

A method of settling certain futures or options contracts whereby the market participants settle in cash (rather than delivery of the commodity).

Charting

The use of graphs and charts in the technical analysis of futures markets to plot price movements, volume, open interest or other statistical indicators of price movement. See also Technical Analysis.

Co-investment

Direct investment by a limited partner alongside a general partner in a portfolio company.

Commodity

1) A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade. 2) Any good exchanged during commerce, which includes goods traded on a commodity exchange.

Commodity Futures Trading Commission (CFTC)

The federal regulatory agency established in 1974 tasked to ensure open and efficient commodity futures markets in the United States.

Commodity Pool

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.

Commodity Pool Operator (CPO)

An individual or organization that operates or solicits funds for a commodity pool. A CPO is generally required to be registered with the CFTC and all registered CPOs must be members of the National Futures Association.

Commodity Trading Advisor (CTA)

A person or firm who, for compensation or profit, directly or indirectly advises others as to the advisability of buying or selling futures or commodity options. Providing advice includes exercising trading authority over a customer’s account. A CTA is generally required to be registered with the CFTC. All registered CTAs who have discretion over customer accounts must be members of the National Futures Association.

Contango

A futures market condition when a commodity trades at a lower price the closer to its expiration or maturity; the opposite of Backwardation.

Contract Market

A board of trade designated by the CFTC to trade futures or options contracts on a particular commodity. Commonly used to mean any exchange on which futures are traded. See also Exchange.

Convergence

The price of a futures contract moves toward the underlying cash commodity price as the futures contract nears expiration.

Correlation

A statistical measure of how two securities move in relation to each other. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random.

Covered Option

A short call (put) option position in which the writer holds a long (short) position in the underlying futures contract or physical commodity.

Cross-Hedging

Hedging a cash commodity using a different but related futures contract when 1) there is no futures contract for the cash commodity being hedged and 2) the cash and futures market follow similar price trends (e.g., using soybean meal futures to hedge fish meal).

Delivery

The transfer of the cash commodity from the seller of a futures contract to the buyer of a futures contract. Each futures exchange has specific procedures for delivery of a cash commodity. Some futures contracts, such as stock index contracts, are cash settled.

Derivative

A financial instrument, traded on or off an exchange, for which the price 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.

Designated Self-Regulatory Organization (DSRO)

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 nonexchange member FCMs. See also Self-Regulatory Organization, Futures Commission Merchant and National Futures Association.

Disclosure Document

A written statement provided by a CTA or CPO which describes the trading strategy, fees, historic performance, principal risk factors and other pertinent information which may be filed with the NFA and provided to prospective clients or investors as required by the NFA and CFTC.

Discount

(1) The amount a price would be reduced to purchase a commodity of lesser grade; (2) sometimes used to refer to the price differences between futures of different delivery months, as in the phrase “July is trading at a discount to May,” indicating that the price of the July future is lower than that of May; (3) applied to cash grain prices that are below the futures price.

Discretionary Account

An arrangement by which the owner of the account gives written power of attorney to someone else, usually the broker or a CTA, to buy and sell without prior approval of the account owner. Also referred to as a Managed Account Managed Account. See also Commodity Trading Advisor.

Discretionary Strategy

Specialized CTA strategy that relies on the trading experience and personal judgment of the manager in the decision making process that can include price and/or fundamental analysis. Managers of this strategy can participate in multiple investment timeframes including long, medium and short.

Diversification

A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Drawdown

Measures the peak to valley loss relative to the peak for a stated time period.

Electronic Trading Systems

System for placing orders, bid and offer posting and trade execution using an electronic medium to bring buyers and sellers together in a virtual market place. It allows participating exchanges to list their products after the close of the exchange, in addition to the open outcry trading hours (i.e. Chicago Mercantile Exchange’s GLOBEX).

Exchange

A marketplace in which securities, commodities, derivatives and other financial instruments are traded. The core function of an 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.

Exercise

The action taken by the holder of the call (put) option of his/her right to purchase (sell) the underlying futures.

Expiration Date

Generally the last date on which an option may be exercised. It is not uncommon for an option to expire on a specified date during the month prior to the delivery month for the underlying futures contracts.

First Notice Day

The first day on which notice of intent to deliver a commodity in fulfillment of an expiring futures contract can be given to the clearinghouse by a seller and assigned by the clearinghouse to a buyer. Varies from contract to contract.

Floor Broker

An individual who executes orders on the trading floor of an exchange on behalf of a firm’s clients.

Follow-on Transaction

A subsequent investment made by a private equity firm after a previous investment in a particular company

Forward (Cash) Contract

A contract that requires a seller to agree to deliver a specified cash commodity to a buyer sometime in the future. All terms of the contract are customized, in contrast to futures contracts whose terms are standardized. Forward contracts are not traded on exchanges.

Fully Disclosed

An account carried by a Futures Commission Merchant (FCM) in the name of an individual customer; the opposite of an Omnibus Account.

Fundamental Analysis

An approach to analysis of futures markets using macroeconomic data, for example supply and demand information, different from Technical Analysis.

Futures Commission Merchant (FCM)

An individual or organization that solicits or accepts orders to buy or sell futures contracts or commodity options and accepts money or other assets from customers in connection with such orders. An FCM must be registered with the CFTC and the National Futures Association.

Futures Contract

A legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. The only variable is price.

Futures Industry Association (FIA)

A trade association of Futures Commissions Merchants and trading advisers operating in global futures markets.

General Partner

The managing partner in a private equity management company who has liability for the actions of the partnership. The general partner is the intermediary between investors with capital and businesses seeking capital to grow.

Grantor

A person who sells an option and assumes the obligation to sell (in the case of a call) or buy (in the case of a put) the underlying futures contract at the exercise price. Also referred to as an option seller or option writer.

Hedge Funds

Privately managed investment funds that utilize sophisticated strategies in both international and domestic markets. Hedge funds may utilize a wider range of investment trading activities and typically vary in structure, investment approach and objective.

Hedging

The practice of offsetting the price risk inherent in any cash market position by taking an equal but opposite position in the futures market. A long hedge involves buying futures contracts to protect against possible increasing prices of commodities. A short hedge involves selling futures contracts to protect against possible declining prices of commodities.

Holder

The purchaser of either a call or put option. Option buyers receive the right, but not the obligation, to assume a futures position. The opposite of a Grantor. Also referred to as the option buyer.

Initial Public Offering (IPO)

The first offering of stock by a company to the public. An IPO is one of the ways in which a private equity fund can exit from an investment.

Internal Rate of Return (IRR)

The standard measure of performance used for private equity investments. It is the net return earned by investors over a particular period, calculated on the basis of cash flows to and from investors, after the deduction of all fees, including carried interest.

In-the-Money Option

An option that has intrinsic value. A call option is in-the-money if its strike price is below the current price of the underlying futures contract. A put option is in-the-money if its strike price is above the current price of the underlying futures contract.

Intrinsic Value

The amount by which an option is in-the money, calculated by taking the difference between the strike price and the market price.

J-Curve Effect

A concept that during the first few years of a private equity fund, cash flow or returns are negative due to investments, losses, and start-up costs; but as investments produce results, the cash flow or returns will move upward so that a graph of cash flow or returns versus time would resemble the letter "J."
No terms available at this time.

Leverage

The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.

Leveraged Buyout (LBO)

The acquisition of a company by an outside investor using mostly borrowed capital. The assets of the company being acquired are often used as collateral to secure the loans.

Limited Partner

Institutions or individuals who invest or contribute capital to a private equity fund. Limited partners are generally protected from legal actions of the partnership. See also general partner.

Liquidate

To take a second futures or options position opposite to the initial or opening position. To sell (purchase) futures contracts of the same delivery month purchased (sold) during an earlier transaction or make (or take) delivery of the cash commodity represented by the futures market. Also referred to as offset.

Liquidity (Liquid Market)

A characteristic of a security or commodity market that allows assets to easily be bought or sold and converted into cash quickly without a substantial change in price.

Managed Account

Managed Funds Association (MFA)

The trade association for professionals in hedge funds, funds of funds and managed futures funds.

Managed Futures

An asset class managed by professional investment managers, known as Commodity Trading Advisors, who use proprietary trading systems to invest in futures and options contracts across a wide range of global markets and asset classes including stocks, bonds, commodities and currencies.

Margin

An amount of money required to buy or sell short futures contracts and for options, the amount of money required from buyers to ensure performance of the terms of the contract from the seller. Margin in commodities is not a down payment, but rather a performance bond.

Margin Call

A call from a clearinghouse to a clearing member, or from a broker or firm to a customer, to bring margin deposits up to a required minimum level.

Market Order

An order to buy or sell a futures or options contract at whatever price is obtainable when the order reaches the trading floor.

Mark-to-Market

To debit or credit on a daily basis a margin account based on the close of that day’s trading session. In this way, buyers and sellers are protected against the possibility of contract default.

Momentum

The accelerating upward or downward trend of a security's price or volume.

National Futures Association (NFA)

The independent, self-regulatory organization for the U.S. futures industry that was created in 1982.

National Introducing Brokers Association (NIBA)

Established as a not-for-profit association in 1991 that represents introducing brokers (IBs) and commodity trading advisors (CTAs).

Net Asset Value

A calculation of assets minus liabilities, plus or minus the value of open positions when marked to market.

Net Performance

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

Notice Day

The day on which a clearinghouse issues notices of intent to deliver on futures contracts.

Offer

An indication of willingness to sell a futures contract at a given price; the opposite of Bid.

Omnibus Account

An account carried by one Futures Commission Merchant (FCM) with another FCM in which the transactions of two or more persons are combined and carried in the name of the originating FCM rather than of the individual customers; the opposite of Fully Disclosed.

Open

The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made “at the open.”

Option Contract

A contract that gives the buyer the right, but not the obligation, to buy or sell a specified quantity of a commodity or a futures contract at a specific price within a specified period of time. The seller of the option has the obligation to sell the commodity or futures contract or buy it from the option buyer at the exercise price if the option is exercised. See also Call Option and Put Option.

Option Premium

The price a buyer pays (and a seller receives) for an option. Premiums are arrived at through open outcry. There are two components in determining this price—extrinsic (or time) value and intrinsic value.

Out-of-the-Money Option

A call (put) option with a strike price higher (lower) than the current market value of the underlying asset; an option that does not have any intrinsic value.

Overbought

A technical opinion that the market price has risen too steeply and too fast in relation to underlying fundamental factors.

Oversold

A technical opinion that the market price has declined too steeply and too fast in relation to underlying fundamental factors.

Over-the-Counter Market (OTC)

A market where products such as stocks, foreign currencies and other cash items are bought and sold by telephone and other electronic means of communication rather than on a designated futures exchange.

Par

The face value of a security.

Pit

The area on the trading floor where trading in futures or options contracts is conducted by open outcry.

Position

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

Position Limit

The maximum number of speculative futures contracts one can hold, as determined by the CFTC and/or the exchange where the contract is traded.

Premium

(1) The amount a price would be increased to purchase a better quality commodity; (2) a futures delivery month selling at a higher price than another; (3) cash prices that are above the futures price; (4) the price paid by the buyer of an option; or (5) the price received by the seller of an option.

Price Limit

The maximum daily price fluctuation permitted for a futures contract during one trading session.

Primary Investment

Primary investments are investments in newly offered private equity investment funds.

Proprietary Trading Systems

Individual company-designed computer code (or algorithm) which analyzes market price action and other data to create trading signals on when to buy or sell securities.

Purchase and Sale Statement (P&S)

A statement sent by a Futures Commission Merchant to a customer when a futures or options position has been liquidated or offset. The statement shows the number of contracts bought or sold, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges and the net profit or loss on the transaction. Sometimes combined with a confirmation statement.

Put Option

An option that gives the buyer the right, but not the obligation, to sell the underlying futures contracts at the strike on or before the expiration date.

Quotation

The actual price or the bid or ask price of either cash commodities or futures or options contracts at a particular time.
No terms available at this time.

Securities Act of 1933

Often referred to as the “truth in securities” law, the Securities Act has two main objectives: 1) require that issuers selling securities to the public disclose material information to investors; and 2) establish laws to prohibit deceit, misrepresentations, and other fraudulent activities in the sale of securities. The full text of this act is available at: http://www.sec.gov/about/laws/sa33.pdf.

Segregated Account

A special account used to hold and separate customers’ assets from those of the broker or firm.

Self-Regulatory Organization (SRO)

Non-government organizations (i.e., the futures exchanges and National Futures Association) that has statutory responsibilities to regulate its members and enforce rules such as minimum financial and sales practice requirements.

Settlement Price

The last price paid for a futures contract on any trading day. Settlement prices are used to determine open trade equity, margin calls and invoice prices for deliveries.

Sharpe Ratio

Used to measure how much profit an investor received per unit of risk. The higher the ratio, the better its risk-adjusted performance. A ratio greater than or equal to one indicates that the return is greater than or proportional to the risk the investor incurred to earn the return. Sharpe Ratio = (Net return – Risk free rate of return)/Standard Deviation of the Return.

Short

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

Single Market Dedicated Strategy

A strategy that trades in a specific market sector with a niche approach to capitalize on the manager’s skills and knowledge. The investment process for a Single Market Dedicated manager can be systematic or discretionary and the investment time frames can vary.

Sourcing

The identification of managers from the broad investment universe according to defined criterion.

Special Situation

Funds that focus on special situations investments typically make mezzanine or other debt investments that provide a middle level financing below the senior debt level of the capital structure and above the equity level. A typical special situation investment may include a loan to a borrower, together with equity in the form of warrants, common stock, preferred stock or some other form of equity investment. In addition, special situations investments may include other forms of investment, such as distressed debt, energy or utility investments and turnaround investments.

Speculator

A market participant who accepts market risk in an attempt to profit by buying or selling futures and/or options contracts by correctly predicting future price movement.

Spot

Usually refers to a cash market price for a physical commodity that is available for immediate delivery.

Spreading

The simultaneous buying and selling of two related markets or commodities in the expectation that a profit will be made when the position is offset.

Standard Deviation

A statistical measure of how consistent returns are over time; a lower standard deviation indicates historically less volatility.

Stop Order

An order that becomes a market order when the futures contract reaches a particular price level. A sell stop is placed below the market; a buy stop is placed above the market.

Strike Price

The price at which the buyer of a call (put) option may choose to exercise his right to purchase (sell) the underlying futures contract. Also referred to as exercise price.

Swap

In general, the exchange of one asset or liability for a similar asset or liability for the purpose of lengthening or shortening maturities, or raising or lowering coupon rates, to maximize revenue or minimize financing costs.

Systematic Strategy

A strategy that utilizes computer driven decision models to make investment decisions, relying on inputs such as price momentum and the rate of price acceleration. This strategy does not involve the manager’s personal judgment on a trade-by-trade basis.

Technical Analysis

An approach to analysis of futures markets which examines patterns of price change, rates of change, and changes in volume of trading, open interest and other statistical indicators, as distinguished from fundamental analysis. See also Charting.

Tick

The smallest allowable increment of price movement for a futures contract. Also referred to as minimum price fluctuation.

Time Value

The amount of money options buyers are willing to pay for an option in anticipation that over time a change in the underlying futures price will cause the option to increase in value. In general, an option premium is the sum of time value and intrinsic value. Any amount by which an option premium exceeds the option's intrinsic value can be considered time value. Also referred to as extrinsic value.

Transparency

The extent to which investors have ready access to any required financial information about a company such as price levels, market depth and audited financial reports. Classically defined as when "much is known by many", transparency is one of the silent prerequisites of any free and efficient market.

Trend Following Strategy

Managed futures strategy that seeks to make profits by capitalizing on the long-term general direction of a market trend. For example, they will be long if prices in a market are rising and will be short if prices are falling.

Uncovered Option

A short call or put option position that is not covered by the purchase or sale of the underlying futures contract or physical commodity. Also referred to as a naked option.

Underlying Futures Contract

The specific futures contract that the option conveys the right to buy (in the case of a call) or sell (in the case of a put).

Venture Capital

Venture capital is, strictly speaking, a subset of private equity and refers to equity investments made for the launch, early development, or expansion of a business.

Vintage year

The first drawdown of capital which is the first year the private equity fund begins investing.

Volatility

A measurement of the change in price over a given time period. Typically higher volatility is associated with an elevated level of risk.

Volume

The number of purchases and sales of futures contracts made during a specified period of time, often the total transactions for one trading day.
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Yield

A measure of the annual return on an investment.

Yield Curve

A chart in which yield level is plotted on the vertical axis, and the term to maturity of debt instruments of similar creditworthiness is plotted on the horizontal axis.
No terms available at this time.