22 Managed Futures Terms To Know

Sortino Ratio vs Sharpe Ratio vs Sterling Ratio vs MAR Ratio vs How Do I Calculate This Ratio…yikes. Managed futures certainly has perfected the art of having a language of it’s own. And it makes sense, there are lot of internal organizations, math equations and extra extras that help to make this industry what it is.  With that being said, keeping it all straight, from industry newbies to managed futures veterans, can be a challenge. We’ve compiled a quick hit list of 22 important terms, concepts, and of course acronyms, for you to keep yourself familiarized with.

Q4 hedge fund letters, conference, scoops etc


Pexels / Pixabay

The Math

  1. Sortino Ratio
    A risk adjusted return ratio that measures returns per unit of risk (with risk defined as standard deviation of negative returns).
    In action: (Compound ROR – risk free ROR) ÷ (Standard Deviation of Negative Returns)
  2. Sharpe Ratio
    This ratio measures return per unit of risk (with risk being the standard deviation of returns).
    In action: (Compound ROR – risk free ROR) ÷ (Standard Deviation of Returns)
  3. MAR Ratio
    Measures returns per unit of risk (with risk defined as the maximum drawdown).
    In action: (Compound ROR) ÷ (Max Drawdown)
  4. S&P 500
    This is a weighted index of the 500 largest U.S. publicly traded companies by market value and is regarded as the best single gauge of large-cap U.S. equities.
    In action: Market cap all S&P 500 stocks ÷ Index Divisor
  5. Max Drawdown
    One of the best measures of risk, the max drawdown is the most loss experienced by an investor in a specific investment.
    In action: (Trough Value – Peak Value) ÷ Peak Value
  6. Max Run-up
    Largest percentage of return between any two points in the history of a program
    In action: (Peak Value – Trough Value) ÷ Trough Value

The Acronyms

  1. Chicago Mercantile Exchange (CME)
    The CME is a financial and commodity derivative exchange based in Chicago that manages risk, trades futures, option, cash and OTC markets, optimizes portfolios, and analyzes data.
  2. Intercontinental Exchange (ICE)
    This company owns exchanges for financial and commodity markets and operates 12 regulated exchanges and marketplace.
  3. Futures Commission Merchants (FCM)
    An organization that solicits and/or accepts orders to buy or sell futures contracts. They typically verify your identity, send over the required margin to place a trade, verify funds, and keep you informed of pertinent account information.
  4. Commodity Trading Advisors (CTA)
    Futures money managers that trade on behalf of clients in identified markets according to a specifically outlined strategy – the manager is placing the trade directly into the clients account.
  5. Commodity Pool Operator (CPO)
    Pools together investor money and places trades in a single account owned by the fund, which leads to lower levels of liquidity and transparency and they can also offer lower minimum investment thresholds than individually managed accounts.
  6. Introducing Broker (IB)
    The person or firm most futures market participants have a relationship with, they’ll go over markets, talk about which programs are doing well, and guide you to the best fit.
  7. Guaranteed Introducing Broker (GIB)
    Very similar to an introducing broker, but they’re affiliated with only one FCM.

The Regulators

  1. Commodity Futures Trading Commission (CFTC)
    The CFTC protects investors and their money from manipulation and abusive practices as defined by the Commodity Exchange Act (CEA).
  2. Commodity Exchange Act (CEA)
    The CEA provides federal regulation of all futures trading activities. It’s main purpose is to limit, or abolish, short selling and eliminate the possibility of market manipulation.
  3. National Futures Association (NFA)
    NFA is the industry-wide, self-regulatory organization that is designated by the CFTC. They safeguard investors and the markets, and unsure members meet their regulatory responsibilities.

The Industry

  1. Managed Futures
    Managed futures refers to an investment where a portfolio of futures is managed by professionals. They’re considered an alternative investment and are often used by funds and institutional investors to provide diversification.
  2. Alternative Investments
    An alternative investment is an asset that is not one of the conventional investment types, such as stocks, bonds and cash. Alternative investments typically include private equity, hedge funds, managed futures, real estate, and commodities.
  3. Notional Funding
    A three-part definition, notional funding is the combination of the technical amount, perceived drawdown, and window dressing amount, which determines the minimum investment amount to begin trading a managed future investment.
  4. Technical Amount
    The amount of money technically needed to make trades that ensures there is enough money for the margin requirement.
  5. Perceived Drawdown Amount
    The amount of money a manager believes an investor needs to withstand any eventual drawdown. This is only a guess, because there is no guarantee on what level the drawdown may meet.
  6. Window Dressing Amount
    A subjective amount that an advisor computes to determine a “nice” average return and risk profile for an investment.

If you’re looking for more in-depth information, history behind the terms, and additional resources, check out our Stats, Definitions, & Players whitepaper!

Article by RCM Alternatives

Saved Articles

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

What’s missing today for many investors is real, straightforward advice.

Especially when it comes to Value Investing and Hedge Funds. 💵

That’s what makes ValueWalk Premium different. Some would say we’re “unusual.”

Our subscribers look forward to clear, easy-to-understand information they can act on.

Sign up for  today for only a few dollars a day and get a 3 day no obligation trial with a targeted 20% discount coupon code.

Cancel anytime during trial and you are never charged.

Limited time offer: For first 50 subscribers