Word of the DayFutures Terms that begin "A"
Absolute Return
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).
Accredited Investor
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.
a) 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.
b) 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.
c) 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.
d) 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.
e) 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.
Active Management
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 want 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.
Active Risk
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.
Aggregation
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.
Alpha
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.
Alpha Generator
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.
American Style Option
An option which may be declared on any day prior to expiration, with the underlying being transferred as a spot transaction for cash.
Analysis of Variance
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.
Annualized Compound Rate of Return
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.
Arbitrage
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.
Arbitration
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.
Ask
The price level of an offer, as in bid-ask spread.
Associated Person (AP)
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.
At-The-Money
The state of an option where the strike price is the same as or nearest to that of the current market price of the underlying asset.
At-the-Money Option
An option whose strike price is equal, or approximately equal, to the current market price of the underlying futures contract.
Average Annual Return (AAR)
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.
Average Recovery Time (ART)
This is the average time in a recovery from a drawdown measured from the low point of the drawdown to a new peak.
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