Chapter 17

Systematic fund trading, often referred to as black-box model trading because the details are hidden in complex software, occurs when the ongoing trading decisions of the investment process are automatically generated by computer programs.

Breakout strategies focus on identifying the commencement of a new trend by observing the range of recent market prices (e.g., looking back at the range of prices over a specific time period).

Capacity risk arises when a managed futures trader concentrates trades in a market that lacks sufficient depth (i.e., liquidity).

Commodity pools are investment funds that combine the money of several investors for the purpose of investing in the futures markets.

Commodity trading advisers (CTAs) are professional money managers who specialize in the futures markets.

A conditional correlation coefficient is a correlation coefficient calculated on a subset of observations that is selected using a condition.

Counterparty risk is the uncertainty associated with the economic outcomes of one party to a contract due to potential failure of the other side of the contract to fulfill its obligations, presumably due to insolvency or illiquidity.

Countertrend strategies use various statistical measures, such as price oscillation or a relative strength index, to identify range-trading opportunities rather than price-trending opportunities.

Degradation is the tendency and process through time by which a trading rule or trading system declines in effectiveness.

Discretionary fund trading occurs when the decisions of the investment process are made according to the judgment of human traders.

Event risk refers to sudden and unexpected changes in market conditions resulting from a specific event (e.g., Lehman Brothers bankruptcy).

The exponential moving average is a geometrically declining moving average based on a weighted parameter, Lambda, with 0<Lambda<1.

Fundamental analysis uses underlying financial and economic information to ascertain intrinsic values based on economic modeling.

Global macro funds have the broadest investment universe: They are not limited by market segment, industry sector, geographic region, financial market, or currency, and therefore tend to offer high diversification.

In-sample data are those observations directly used in the backtesting process.

Lack of trends risk, which comes into play when the trader continues allocating capital to trendless markets, leading to substantial losses.

Leverage refers to the use of financing to acquire and maintain market positions larger than the assets under managemant (AUM) of the fund.

Liquidity risk, is somewhat related to capacity risk in that it refers to how a large fund that is trading in a thinly traded market will affect the price should it decide to increase or decrease its allocation.

A managed account (or separately managed account) is created when money is placed directly with a CTA in an individual account rather than being pooled with other investors.

The term managed futures refers to the active trading of futures and forward contracts on physical commodities, financial assets, and exchange rates.

Market microstructure is the study of how transactions take place, including the costs involved and the behavior of bid and ask prices.

Market risk refers to exposure to directional moves in general market price levels.

Mean-reverting refers to the situation in which returns show negative autocorrelation - the opposite tendency of momentum or trending.

Model risk is economic dispersion caused by the failure of models to perform as intended.

Momentum is the extent to which a movement in a security price tends to be followed by subsequent movements of the same security price in the same direction.

The Mount Lucas Mangement (MLM) Index is a passive, transparent, and investable index designed to capture the returns to active futures investing.

A moving average is a series of averages that is recalculated through time based on a window of observations.

A natural hedger is a market participant who seeks to hedge a risk that springs from its fundamental business activities.

Out-of-sample data are observations that were not directly used to develop a trading rule or even indirectly used as a basis for knowledge in the research.

A pattern recognition system looks to capture non-trend-based predictable abnormal market bahavior in prices or volatilities.

Privat commodity pools are funds that invest in the futures markets and are sold privately to high-net-worth investors and institutional investors.

Public commodity pools are open to the general public for investing in much the same way that a mutual fund sells its shares to the public.

A price series with changes in its prices that are independent form current and past prices is a random walk.

The relative strength index (RSI), sometimes called the relative strength indicator, is a signal that exemines average up and down price changes and is designed to identify trading signals such as the price level at which a trend reverses.

Robustness refers to the reliability with which a model or system developed for a particular application or with a particular data set can be successfully extended into other applications or data sets.

A sideways market exhibits volatility without a persistent direction.

The most basic approach uses a simple moving average, a simple arithmetic average of previous prices.

Slippage is the unfavourable difference between assumed entry and exit prices and the entry and exit prices experienced in practice.

Systematic fund trading, often referred to as black-box model trading because the details are hidden in complex software, occurs when the ongoing trading decisions of the investment process are automatically generated by computer programs.

Technical analysis relies on data from trading activity, including past prices and volume data.

Thematic investing is a trading strategy that is not based on a particular instrument or market; rather, it is based on secular and long-term changes in some fundamental economic variables or relationships - for example, trends in population, the need for alternative sources of energy, or changes in a particular region of the world economy.

Transparency is the ability to understand the detail within an investment strategy or portfolio.

Transparency risk is dispersion in economic outcomes caused by the lack of detailed information regarding an investment portfolio or strategy.

Trend-following strategies are designed to identify and take advantage of momentum in price direction (i.e., trends in prices).

Validation of a trading rule refers to the use of new data or new methodologies to test a trading rule developed on another set of data or with another methodology.

A weighted moving average is usually formed as an unequal average, with weights arithmetically declining from most recent to most distant prices.

Whipsawing is when a trader alternates between establishing long positions immediately before price increases and, in so doing, experiences a sequence of losses. In trend following strategies, whipsawing results from a sideways market.