Glossary of Managed Futures Terms
Alpha
A measure of a fund’s risk in relation to the market. A positive alpha represents the extra return rewarded to the investor for taking a risk instead of accepting the market return.
Alternative Investment
An investment vehicle that is not based on holding traditional assets such as stocks, bonds or real estate.
Arbitrage
The simultaneous purchase and sale of identical or equivalent financial instruments or commodity futures in order to benefit from a discrepancy in their price relationship.
Associated Person (AP)
An individual who solicits orders, customers, or customer funds (or who supervises persons performing such duties) on behalf of a Futures Commission Merchant, an Introducing Broker, a Commodity Trading Advisor, or a Commodity Pool Operator.
Back-Testing
The process of testing a trading strategy (primary technical) through use of historical data.
Beta
A measure of an investment’s volatility, or systemic risk, in comparison to the market (or benchmark) as a whole. A managed futures program with a beta of one means returns move in line with the market; greater than one means returns are more volatile than the overall market; less than one, less volatile than the overall market.
Black Box
“Black-box” trading refers to a technical style in which trading decisions are made by complex, computerized trading systems. The black box portion of the system contains formulas and calculations to create signals that the user often does not see or know.
Broker
A person paid a fee or commission for executing buy or sell orders for a customer. In commodity futures trading, the term may refer to: (1) Floor Broker - a person who actually executes orders on the trading floor of an exchange; (2) Account Executive or Associated Person - the person who deals with customers in the offices of Futures Commission Merchants; or (3) the Futures Commission Merchant.
CFTC (Commodity Futures Trading Commission)
A federal regulatory agency established under the Commodity Exchange Act that oversees futures trading in the United States. The commission is comprised of five commissioners, one of whom is designated as chairman, all appointed by the President subject to Senate confirmation, and is independent of all cabinet departments.
Clearinghouse
An agency or separate corporation of a futures exchange that is responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data. Clearinghouses act as third parties to all futures and options contracts acting as a buyer to every clearing member seller and a seller to every clearing member buyer.
Commodity Pool
An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures contracts or commodity options.
Commodity Pool Operator (CPO)
An individual or organization that operates or solicits funds for a commodity pool.
Commodity Trading Advisor (CTA)
A person who, for compensation or profit, directly or indirectly advises others as to the value or the advisability of buying or selling futures contracts or commodity options. Advising indirectly includes exercising trading authority over a customer's account as well as providing recommendations through written publications or other media.
Customer Margin
Within the futures industry, funds required of both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfillment of contract obligations.
Day Trade
The purchase and sale of a futures or an options contract in the same day session, thus ending the day with no established position in the market or being flat.
Discretionary
A discretionary account refers to an arrangement by which the holder of the account gives written power of attorney to another person, often his/her broker, to make trading decisions. Also known as a controlled or managed account. Discretionary also is a term used to describe a money manager's style of trading. Discretionary trading generally involves a money managers’ analysis of fundamental factors to make trading decisions, rather than a reliance on technical analysis.
Drawdown
A reduction in account equity from a trade or series of trades, or simply, a losing period. In managed futures, drawdowns are generally measured as the time a retreat in performance begins to when a new high is reached, or percentage between the peak to the trough.
Fundamental Analysis
A method of anticipating future price movement using supply and demand information.
Futures Commission Merchant (FCM)
A firm or person engaged in soliciting or accepting and handling orders for the purchase or sale of futures contracts, subject to the rules of a futures exchange and, who, in connection with solicitation or acceptance of orders, accepts any money or securities to margin any resulting trades or contracts. The FCM must be licensed by the CFTC.
Global Macro Strategy
A hedge fund strategy that bases its holdings in various fixed income, equity, currency and futures markets primarily on overall macroeconomic principles. That is, fundamental supply and demand factors tied to economic and political events in a given country.
Hedge Fund
An aggressively managed investment with the primary goal(s) of managing risk and/or achieving a maximum rate of return for investors. Hedge funds are not always in a true sense “hedgers;” they use strategies including options, futures, swaps and arbitrage in a variety of emerging and established exchange-traded and over-the-counter markets.
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. Hedgers use the futures markets to protect their businesses from adverse price changes. See Selling (Short) Hedge and Purchasing (Long) Hedge.
Introducing Broker (IB)
A person or organization that solicits or accepts orders to buy or sell futures contracts or commodity options but does not accept money or other assets from customers to support such orders.
Leverage
The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.
Maintenance Margin
The minimum value required in an account in order to continue to hold a position. The maintenance margin is typically less than the initial margin, and also differs by contract. If your account falls below the maintenance margin requirement, you will receive a margin call. If you wish to continue to hold the position, you will be required to restore your account to the full initial margin level (not to the maintenance margin level). Also known as the Maintenance Performance Bond.
Managed Futures
Represents an asset class comprised of professional money managers known as commodity trading advisors who manage client assets on a discretionary basis, using global futures markets as an investment medium.
Margin Call
A call from a clearinghouse to a clearing member, or from a brokerage firm to a customer, to bring margin deposits up to a required minimum level.
National Futures Association (NFA)
An industry-wide, industry-supported, self-regulatory organization for futures and options markets. The primary responsibilities of the NFA are to enforce ethical standards and customer protection rules, screen futures professionals for membership, audit and monitor professionals for financial and general compliance rules, and provide for arbitration of futures-related disputes.
Original Margin
The amount a futures market participant must deposit into a margin account when placing an order to buy or sell a futures contract. Also referred to as initial margin.
Over-the-Counter (OTC) Market
A market where a product such as stocks, foreign currencies, and other cash items are bought and sold by telephone and other means of communication.
Performance Bond
Funds that must be deposited by a customer with a broker, by a broker with a clearing member or by a clearing member, with the clearinghouse to initiate or maintain a market position. The performance bond helps to ensure the financial integrity of brokers, clearing members and the exchange. Also known as Margin.
Performance Bond Call (Margin Call)
A demand for additional funds because of adverse price movement.
Position Trader
An approach to trading, in which the trader either buys or sells, contracts and holds them for an extended period of time.
Round-Turn
Procedure by which a long or short position is offset by an opposite transaction or by accepting or making delivery of the actual financial instrument or physical commodity.
Speculator
One who attempts to anticipate price changes and, through buying and selling futures contracts, aims to make profits. A speculator does not use the futures market in connection with the production, processing, marketing or handling of a product.
Technical Analysis
Anticipating future price movement using historical prices, trading volume, open interest, and other trading data to study price patterns.
Trend
The general direction of the market.
Trend-Follower
A term used to describe a money manager’s style of trading. Trend-following generally involves a technical approach to tracking sustained price movements and entering and exiting trades according to those trends.
Definitions are not intended to suggest the correct legal significance or exact meaning. They were collected from several sources to help in your understanding of the futures and options industry.
Links to Industry Associations
Managed Funds Association
Commodity Futures Trading Commission
National Futures Association
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