Glossary of Terminology
The vocabulary of systematic investing, defined plainly. Every term has its own page, and the ones a definition mentions are linked from it.
Return & Performance Metrics
Absolute Return Strategy
An investment approach designed to generate positive returns regardless of whether markets go up or down.
Alpha
Alpha represents the 'skill' component of returns—the return that cannot be explained by simply taking market risk.
CAGR (Compound Annual Growth Rate)
The annualized rate of return that, if applied consistently each year, would produce the same total return over the investment period.
Cumulative Return
The total aggregate return of an investment over its entire holding period, accounting for the compounding effect of reinvested gains.
Expected Value
The probability-weighted average outcome of a decision or trade, calculated by multiplying each possible outcome by its probability and summing the results.
Omega Ratio
A risk-adjusted performance metric that measures the probability-weighted ratio of gains versus losses relative to a threshold return.
Win Rate
The percentage of trades or decisions that result in a profit relative to total number of trades executed.
Risk Metrics
Bear Market
A market environment characterized by declining prices and widespread pessimism.
Beta
A measure of an investment's systematic risk—how much it moves relative to a benchmark index.
Bull Market
A market environment characterized by rising prices and investor confidence.
Calmar Ratio
A risk-adjusted performance metric calculated as the average annual return divided by the maximum drawdown.
Correlation
A statistical measure of how two investments move in relation to each other, ranging from -1.0 (perfect negative correlation) to +1.0 (perfect positive correlation).
Drawdown
The peak-to-trough decline in investment value during a specific period.
Maximum Drawdown
The largest peak-to-trough decline observed in the entire history of an investment.
Sharpe Ratio
A risk-adjusted performance metric calculated as (return − risk-free rate) / volatility.
Sortino Ratio
Similar to Sharpe Ratio but uses only downside volatility in the denominator rather than total volatility.
Systematic Risk
The component of volatility that cannot be eliminated through diversification because it is driven by broad market factors.
VaR (Value at Risk)
A statistical estimate of the maximum loss expected over a given time horizon at a specified confidence level.
Volatility
A statistical measure of the dispersion of returns, typically expressed as annualized standard deviation.
Trading & Execution
Algorithmic Trading
The use of computer programs and mathematical models to execute trades automatically based on predetermined rules and conditions.
Backtesting
The process of testing a trading strategy using historical data to evaluate its performance before implementing it with real money.
Bid-Ask Spread
The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask).
Fill Price
The actual price at which an order is executed.
Rebalancing
The process of adjusting portfolio holdings to restore target allocations after market movements change the weights.
Slippage
The difference between the expected execution price of a trade and the actual fill price, typically due to market movement during the time between order submission and execution.
Technical Indicators
Mathematical calculations applied to price and volume data to identify trends, momentum, and potential turning points.
Portfolio & Strategy
Asset Allocation
The process of dividing an investment portfolio among different asset classes (e.g., stocks, bonds, commodities, cash) to balance risk and return.
Benchmark
A standard or index against which investment performance is measured.
Diversification
The practice of spreading investments across multiple asset classes, securities, and strategies to reduce risk.
Efficient Frontier
A graph of optimal portfolios that offers the highest expected return for a given level of risk, or equivalently, the lowest risk for a given return.
Gamma Exposure (GEX)
A market dynamics measure that quantifies the impact of options positioning on stock price movements.
Hedge
An investment position designed to offset or reduce the risk of an existing position.
Long Position
Owning an investment with the expectation that its price will rise.
Market Regimes
Distinct market environments characterized by different return patterns, correlations, and volatility levels.
Mean Reversion
A statistical principle that extreme prices tend to move back toward historical averages or 'means' over time.
Momentum
The tendency for asset prices that have been moving in one direction to continue moving in that direction.
Short Position
Selling an investment (often borrowed) with the expectation that its price will fall, then buying it back at a lower price to profit from the difference.
Trend Following
A trading strategy that identifies and trades in the direction of established price trends.
Measurement & Analysis
Basis Point (bps)
A unit of measurement equal to one-hundredth of a percent (0.01%).
Information Ratio
A risk-adjusted performance metric that measures excess return relative to benchmark per unit of tracking error, calculated as (portfolio return − benchmark return) / tracking error.
R-Squared
A statistical measure of how closely an investment's returns track its benchmark, ranging from 0 to 1.0 (or 0% to 100%).
Tracking Error
The volatility of the difference between portfolio returns and benchmark returns, expressed as annualized standard deviation.
Treynor Ratio
A risk-adjusted performance metric calculated as (return − risk-free rate) / beta.
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