i. Percentage rate of return: Usually the average compound of the gain or loss on an investment during a specified period of time.

ii. Worst ever drawdown: A drawdown in managed futures jargon is quite simply a loss. This type of drawdown is the worst peak to valley loss, relative to the peak. It is usually calculated using monthly data.

iii. Standard deviation: This is a measure of the volatility of returns. The lower the number, the better it is if you want low historic volatility. Standard deviation is technically defined as the square root of the average of the squared deviations of monthly rates of return from the arithmetic- mean rate of return: the standard deviation measures the average spread of monthly returns around the mean.

iv. Semi-deviation: This is a measure of downside risk. It is calculated in the same way as standard deviation except that it only looks for theobservations that fall below the mean. Standard deviation only tells you how volatile the historic record has been. What it does not tell you is whether this volatility has been on the positive or the negative side. The semi-deviation figure will tell you this. So, if the semi-deviation figure is lower than the standard deviation figure then the historic volatility has been more on the upside. If the semi-deviation figure is higher than the standard deviation figure, then in the past the volatility has been more on the downside. What it does not do, of course, is tell you whether or not this pattern will continue.

v. Sharpe ratio: This is a measure of risk/reward. This ratio tries to quantify the relationship between reward and risk by removing the risk- free rate of return. There are a number of ways to calculate Sharpe ratio. One of them is to take the average monthly rate of return, subtract from this the risk-free rate of return (for example, the return that could have been achieved if the money allocated to investment in futures was instead allocated to investment in relatively risk-free instruments such as US treasury bills) and divide this by the standard deviation of the monthly rates of return. What you are left with is the reward for pure risk-taking. The higher the ratio, the better the performance and vice versa.

• Meaden comments that there are two main weaknesses to using Sharpe ratio as a measure of risk:
• First, it is essential to have faith in all components of the equation. Secondly, there are a number of different methods which can be used to compute the ratio. If you are comparing different Sharpe ratios, make sure that they have been computed using the same formula.

vi. Risk of ruin: The chance the investor has of losing the lot or, as Baratz rather more elegantly puts it: ‘The probability that an account’s original value will be reduced by a predetermined percentage as a result of trading losses.’

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