Average Annual Return
A percentage figure used
when reporting the historical
return, such as the three–,
five– and 10–year
average returns of a managed
account. The average
annual return is typically
stated net of management,
incentive and trading fees.
Calmar Ratio
A ratio used to determine
returns relative to downside
risk (drawdowns) in a managed
account. The Calmar Ratio
is determined by dividing
the compounded annual return
by the maximum drawdown,
using the absolute value.
Generally speaking, a higher
ratio is better. Most Calmar
Ratios utilize 36 months
of data.

 
MAR Ratio:
A
ratio that is identical
to the Calmar Ratio except
that it uses all performance
data available.
Correlation
Is a measure of the interdependence
or strength of the relationship
between two investments.
It tells us something about
the degree to which the
variations of returns from
their respective means move
together. If two investments
are positively correlated,
when one performs above
its mean return it is likely
that the other will also
perform above its own mean
return. If two investments
are negatively correlated,
when one performs above
its mean return it is likely
that the other will perform
below its mean return. Note
that correlation says nothing
about the mean returns themselves –
they could both be up, or
both down, or one could
be up and one down. To measure
the strength of the relationship,
we use the correlation coefficient.
These values range from –1
(perfect negative correlation),
through 0 (no correlation
or uncorrelated) to +1 (perfect
positive correlation). From
a risk management perspective,
it is generally favorable
if two investments are uncorrelated
because it means that there
is no identifiable directional
pattern or proportional
relationship between the
deviations of their monthly
returns. The general
idea is that a portfolio
consisting of uncorrelated
assets should produce a
smoother overall return
profile than a portfolio
with assets that have a
positive correlation with
each other.
Drawdown
An investment is said to
be in a drawdown when its
price falls below its last
peak. The period between
the peak level and the trough
is called the “Length”
of the drawdown. The
period between the trough
and the recapturing of the
peak is called the “Recovery”.
The worst or “Maximum
Drawdown” represents
the greatest peak to trough
decline over the life of
an investment.
Incentive Fee
Often referred to as a “Performance
Fee”, this is the
fee earned by a manager
on new profits that surpass
the previous highwater
mark (high in equity).
Kurtosis
Kurtosis
characterizes the relative
peakedness or flatness of
a distribution compared
with the normal distribution.
Positive kurtosis indicates
a relatively peaked distribution.
Negative kurtosis indicates
a relatively flat distribution.
Sharpe Ratio
A measure of risk–adjusted
performance that indicates
the level of excess return
per unit of risk. In the
calculation of Sharpe Ratio,
excess return is the return
over and above the short–term
risk free rate of return
and this figure is divided
by the risk (standard deviation).
In general, the greater
the Sharpe ratio the greater
the risk–adjusted
return.
Skewness
A measurement that characterizes
the degree of asymmetry
of a distribution of returns
around its mean.
Sortino Ratio
A measure of risk–adjusted
performance that indicates
the level of excess return
per unit of downside risk.
It differs from the Sharpe
Ratio in that it recognizes
investors“ preference for
upside (“good“) over downside
(“bad“) volatility.
It uses a measure of “bad“
volatility as provided by
semi–deviation –
the annualized standard
deviation of the returns
that fall below a target
return (typically the risk
free rate).
*This is different from
the Sharpe Ratio in that
it penalizes only those
returns falling below a
userspecified target, while
the Sharpe Ratio penalizes
both upside and downside
volatility equally.
In our opinion, the Sortino
ratio is a more meaningful
measure of riskadjusted
returns than the Sharpe
Ratio.
Sterling Ratio
A comparison of historical
reward and risk. The
Sterling Ratio is equal
to the average annual rate
of return for the past three
calendar years divided by
the average of the maximum
annual drawdown in each
of those three years plus
10%.
Systematic vs. Discretionary
Systematic trading is a
mechanical set of rules
covering entry and exit
orders based on a preestablished
and predefined plan.
Discretionary trading relies
on the manager’s judgment
for entry and exit orders,
typically based on a preestablished
and predefined plan.
Value–Added Monthly
Index (VAMI)
VAMI is defined as the growth
in value of an average $1000
investment. VAMI is calculated
by multiplying (1 + current
monthly ROR) X (previous
monthly VAMI). VAMI assumes
the reinvestment of all
profits, less incentive,
management and trading fees.
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