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Absolute Return
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A hedge fund investment strategy that targets a fixed level of return (e.g. 10%), or positive investment returns, rather than investment returns which are compared to market indices. |
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Acceptance
|
A bill of exchange guaranteed by a bank and made eligible to be sold at the maximum rate. |
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Accumulating Fund
|
A type of fund that re-invests income and capital gains in other investable assets. The investment return from an accumulating fund is included in the appreciation or depreciation of its unit price. At their discretion, fund managers may distribute income to unit holders. |
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Actively Hedged Funds
|
These can be invested in equities, fixed interest and money market instruments. The fund managers can speculate in the derivatives market and/or employ hedging techniques, utilizing various option contracts. |
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Administration Fee
|
The fee paid to the fund administrator. Usually a minimum amount or a percentage of the fund’s net asset value. |
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The organisation employed by a mutual fund / unit trust to give professional advice on the fund’s investments and asset management practices. |
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Advisory Client
|
A client who is given investment recommendations by a broker but is responsible for the decisions made. The other types of relationships between broker and client are discretionary, where the broker makes investment decisions, and execution-only where the client makes decisions but receives no advice from the broker. |
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Agency Broker
|
A broker who acts as an agent between buyer and seller but is not, in the UK context, a market maker. |
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Aggressive Growth
|
An opportunistic hedge fund investment strategy where a manager trades aggressively in order to produce the highest possible returns. These funds often use leverage and trade options to achieve their objective. |
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Aggressive Growth Funds
|
Funds that seek to maximise capital gains as an investment objective. Income generation is not a significant factor. Some funds may invest in stocks of businesses that are somewhat out of the mainstream, such as fledgling companies, new industries, companies fallen on hard times, or industries temporarily out of favour. Others may also use specialised investment techniques such as option writing or short-term trading. |
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AIS (go to top)
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Alternative Investment Strategy. |
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Alpha
|
A coefficient (a) indicating a manager’s risk-adjusted excess rate of return relative to a benchmark. It measures a manager’s "value-added" in selecting individual securities, independent of the effect of overall market movements. Most active investors are trying to maximise alpha. |
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Alternative Investment Strategy
|
Investment in hedge funds and other non-traditional investment types (eg private equity / venture capital). |
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American Depository Receipt (ADR)
|
This is a negotiable certificate representing ownership of shares in a non-US company. ADRs are issued by US banks and are traded in the domestic securities market. The certificates indicate the number of foreign securities held by the US bank in the country of origin. ADRs are also called American Depository Shares. |
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Amortisation
|
The allocation of portions of an asset’s cost to specified periods of time. |
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Total balances (including accrued charges) still owed by the debtor at the end of a particular accounting period. |
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Annual Report
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Annual accounts which contain a review of a fund’s current financial status and a summary of the changes that have occurred in the past year. |
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Annualised Mean
|
Twelve times the annual mean of monthly percent changes. |
Annualised Standard
Deviation
|
The standard deviation of the monthly percent changes multiplied by the square root of twelve. |
Approved Investment
Trust
|
A trust which satisfies the requirements of Section 842 of the UK’s Income and Corporation Taxes Act 1988 as amended by Section 117 of the Finance Act 1988 and is therefore exempt from tax on the capital gains realised from the sale of investments within its portfolio. |
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A means of exploiting price differences for similar instruments between different markets with no net outlay of capital. An early example of arbitrage occurred in the dollar/sterling markets in New York and London. Because prices in the two markets sometimes differed, traders could occasionally buy dollars or pounds in one market, and sell them immediately in the other for a profit. As a result of satellite communications, such geographical arbitrage is now rare. Modern arbitrage occurs frequently in the cash and futures markets, or it can involve options. It is a purely professional occupation, since most opportunities are only available for a few seconds. |
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Asked or
"Offering"
Price
|
The price at which a mutual fund’s shares or a unit trust’s units can be purchased, or the current net asset value per share plus sales charge, if any. |
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Asset Allocation
|
The process whereby an investment manager decides which type of assets to invest in and the proportion of total capital to be allocated to each class. |
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Asset Swap
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By taking advantage of market imperfections, a fixed-rate asset can, theoretically, be transferred into a floating-rate one, either in the same currency or a different one. Known as synthetic securities, asset swaps can be used to spot pricing anomalies in the bond and swaps markets, which can be exploited accordingly. |
Asset Swap Spread
(go to top)
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The spread over the LIBOR rate received by the asset swap buyer in an asset swap. It reflects the price and credit quality of the asset. |
Association of
Investment Trust
Companies (AITC)
|
The collective voice for UK investment trusts. Which acts to protect, promote and advance the common interests of its member trusts and their shareholders. |
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Auditor
|
A certified accountant who examines a company’s books according to a set of legal or accounting procedures and issues a report. |
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Back-to-Back Loan
|
A form of medium-to long-term financing by which a UK company, for example, may borrow foreign currency and at the same time purchase UK government bonds of equal value and maturity, or deposit an equal amount of sterling in a deposit account. |
Balance Sheet
(go to top)
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The statement of the capital position of a company, showing what it owns (assets) and what it owes (liabilities). Normally companies produce an independently audited balance sheet and financial statement once a year in their annual report. |
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Balanced Funds
|
Funds which generally have a three-part investment objective: 1) to conserve the investors’ initial principal; 2) to pay current income; and 3) to promote long-term growth of both this principal and income. Balanced funds usually have a portfolio mix of bonds, preferred, and common stocks. |
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Base Currency
|
In principle, the currency in which a fund maintains its accounts. However, sub-funds within an umbrella structure may be denominated in different currencies. The investments or holdings of a fund may also be denominated in currencies other than the base currency. |
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Basel Capital Accord
|
The framework of rules within which banks calculate their regulatory capital requirement. The initial rules where produced by the Basel Committee on Bank Supervision in 1988, known as the Basel Capital Accord. |
Basis Point
(go to top)
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One basis point is a hundredth of a percentage point. The term is commonly used in currency and bond markets where large sums of money are moved. A small basis point movement can mean large profits for those involved in the transactions. |
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Bear
|
This term describes an investor who thinks that a market will fall. The term also refers to a short position held by a market maker and a market where prices are falling over an extended period. |
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Bearer Bond
|
A bond which can be redeemed by whoever presents it at the redemption date, rather than by the person who owns it. |
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Bearer Security
|
A bond or share whose ownership is not recorded on a central register and is therefore the equivalent of cash in a capital market. See registered securities. |
Beneficial Owner
(go to top)
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The person who really owns a security rather than a nominee that may own shares on behalf of others. |
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Beta
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A coefficient (ß) measuring a stock’s relative volatility to a market index, such as the S&P 500 Index. A manager with a Beta greater than 1.0 is more volatile than the market, while a manager with a Beta less than 1.0 is less volatile than the market. Sometimes known as market specific risk. |
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Bid Price
|
The price which an investor is willing to pay for the securities in the market. In the case of mutual funds, it is the price at which an asset management company will buy from investors. |
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Bid/Offer Spread
|
The difference in price between the bid and offer prices at any given time. |
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Billion (bn)
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1,000 million. |
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The term given to shares of well-known, long established companies which often have large market capitalisation, a high degree of liquidity within the stock markets and usually pay dividends. The term was named after the highest value chip in poker. |
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Bonds
|
An interest-bearing security which charges the issuer to pay to the holder the par value plus interest (coupon value) at some future date or over a period of time. The time schedule of the repayment varies with the type of bond. Be aware that in the UK bonds are referred to as gilts or stocks. |
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Bottom-Up Investing
|
An investment approach which seeks to identify the best performing individual securities before considering the impact of economic trends. |
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Box
|
An amount of cash reserves required by UK regulations to meet unit holder redemptions at any given time. |
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These are issued to commercial banks by debtor countries to repay defaulted developing country loans. These bonds, named after former US Treasury Secretary Nicholas Brady, are partially collateralised by the US Treasury Department. |
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Break-up Basis
|
A means of calculating net asset values by which prior charges are deducted at nominal or redemption value. (Commonly used by UK investment trusts.) |
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Broker/Dealer
|
A firm that buys and sells mutual fund shares and other securities to the public. |
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Bull
|
A term used to describe an investor who thinks the market will rise. It also refers to a long position held by a market maker and to a market where prices are on a rising trend. Investors who think a market will rise are bullish. |
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Sterling denominated bonds issued in the United Kingdom by overseas borrowers. |
Call
|
An option to buy a share or commodity at a set price for a set term. |
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Capital Gains Distributions
|
Payments to mutual fund shareholders of profits (long-term gains) realised on the sale of the fund’s portfolio securities. These distributions may be paid once a year. |
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Capital Growth
|
An increase in the market value of a mutual fund’s unit trusts securities, which is reflected in the net asset value of its shares. This is a specific long-term objective of many mutual funds. |
Capital Structure
Arbitrage
|
A hedge fund investment strategy that seeks to profit from the phenomenon that while a company is restructuring, the prices of its different financial instruments can become mispriced relative to one another. Distressed securities specialists purchase the undervalued security and take short trading positions in the overpriced security to extract an arbitrage profit. |
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The current market in an underlying security and / or for immediate delivery. |
Certificate of
Deposit (CD)
|
A tradable bank deposit used by institutional investors who put their money with a bank and get a three-month CD instead of having to deposit that money for three months. If their circumstances change, the institution can sell the bill in the money market. Because they are negotiable, CDs tend to pay a slightly lower rate of interest than conventional deposits. |
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Certificated Share
|
A share of stock for which a certificate is issued and registered as being owned by a specific holder or nominee. The majority of shareholders usually find non-certificated (bearer) shares to be more convenient. |
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Circulating Capital
|
A hedged, dollar-denominated subordinated loan bond with current dollar assets. |
Closed-Ended Funds
(go to top)
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A collective investment scheme, such as a UK investment trust, which has a fixed capital structure. Variations in demand for the shares of the fund are reflected in the movements in their market price which may reflect a premium or a discount in their net asset value. |
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Collateralised
Debt
Obligation
(CDO)
|
A note whose cash flows are linked to the incidence of default in a pool of debt instruments is called a CDO. When the underlying collateral in a CDO is made up of bonds, it is called a Collateralised Bond Obligation (CBO). When the underlying collateral in a CDO is made up of loans, the CDO is usually called a Collateralised Loan Obligation (CLO). |
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Commercial Bill
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A bill used as an international payment system that guarantees to pay for exported goods when they are delivered some months hence. For example, to ease his cash flow, an exporter sells a commercial bill to a merchant bank (often an accepting house) at a discount to its total value. The bank guarantees the bill and sells it on at a higher price because of the bank’s credit worthiness). The discounted bill is then traded as a money market instrument. |
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Commodity Funds
|
Funds that invest in shares of companies that operate in commodity related industries or hold physical commodities such as bullion. |
Consolidated Accounts
(go to top)
|
The accounts of a group of companies or subsidiaries which are amalgamated to give an overall financial picture. |
Consumer Price Index
(CPI)
|
The commonly used yardstick for measuring the rate of inflation in the US. |
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Conversion Premium
|
The difference between the price of a convertible bond or preferred share and the underlying equity conversion value. For example, if the convertible trades at US$100 and the underlying shares trade at US$80, the conversion premium is US$20 (or 25 percent). Convertibles with high conversion premiums are traded in the same say as straight bonds, while convertibles with low premiums are traded as underlying shares would be. |
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Convertible
|
A bond or share which has the option to convert into another bond or share at a fixed date or set of dates and under fixed terms. |
Convertible Arbitrage
(go to top)
|
A hedge fund investment strategy that seeks to exploit pricing inefficiencies between a convertible bond and the underlying stock. A manager will typically take a long position in the convertible bond and a short position in the underlying stock. |
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Core-satellite Approach
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An alternative to the traditional balanced asset allocation approach to portfolio construction. In a core-satellite strategy, an investment manager will invest typically 70-80% of assets in an index tracking fund and the remainder with a series of specialist "satellite" fund managers in sectors where index-tracking techniques are difficult to apply (eg hedge funds or smaller companies). |
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Corporate Bond Funds
|
Funds that seek a high level of income by buying corporation bonds as the basis of the portfolio, with the remainder in US Treasury bonds/gilts or bonds issued by a government agency. |
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Corporate Debt
|
A debt instrument issued by a corporation obliging it to pay the bondholder a specified income at specific intervals and to repay the principal amount of the loan at maturity. |
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A statistical measure of the degree to which the movements of two variables are related. A correlation of 1 between two different asset classes means that they have moved completely in line with each other. A correlation of –1 between two asset classes means that they have moved completely in opposition to each other. A correlation of zero means that the asset classes show no relationship in the way that they move relative to each other. |
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Cost of Carry
|
The difference between the cost of borrowing money and the yield which the investment offers. |
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Country Fund
|
A mutual fund which may be closed-ended or open-ended and has more than 70 percent of its assets invested in a specific country. |
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Coupon
|
The amount of interest which a bond pays on its nominal value, rather than its yield, which is the rate of interest the bond pays based on the market price of the bond. The coupon refers to the fact that bonds historically bonds have had detachable interest payment coupons attached to them. |
Credit Event
(go to top)
|
A legal definition that is used to characterise the nature of the event that triggers the payout on a credit derivative. It may include such events as bankruptcy, default and restructuring. |
Cross-Currency
Interest Rate
Swaps
|
A combination currency/interest rate swap, identical to a fixed currency asset except that one or both sets of interest payments are on a floating-rate basis. |
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CTA
|
Commodity Trading Advisor. CTA’s generally trade commodity futures, options and foreign exchange and most are highly leveraged. See also Managed Futures. |
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Currency Exposure
|
The net effect in terms of exposure to a currency after taking into account the equity investments, bonds and net cash held in that currency, deducting any prior capital and loans in that currency and adjusting for the effect of any forward exchange or hedging commitments involving that currency. |
Currency Forward
(go to top)
|
See Forward. |
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Currency Swap
|
A transaction between two parties that involves the exchange of interest payments in one currency for interest payments in another currency. Unlike an interest rate swap, a currency swap must involve the initial exchange and final re-exchange of principal between two parties at a specific exchange rate. |
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Current Leverage
|
The amount of leverage currently used by the fund as a percentage of the fund. For example, if the fund has US$1,000,000 and borrowing another US$1,500,000, to bring the total dollars invested to US$2,500,000, then the leverage used is 150%. |
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Custodian
|
An organisation, usually a bank, that keeps custody of securities and other assets of a mutual fund, and may perform dividend and interest collection services. Custodians normally receive a fee for their services ranging from 0.1% to 0.25% p.a. of the NAV. |
Debentures
(go to top)
|
A bond or loan which is unsecured by any collateral and ranks as secondary to secured borrowing. |
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Debt
|
A term used to group fixed income or bond instruments such as gilts, US Treasuries, notes, mortgage backed bonds etc.
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Debt Ratio
|
The total borrowings of a company divided by its capital employed.
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Dedicated Short
Bias
|
A hedge fund investment strategy that maintains net short as opposed to pure short exposure. Short biased managers take short positions in mostly equities and derivatives. The short bias of a manager’s portfolio must be constantly greater than zero to be classified in this category.
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Default Swap
(go to top)
|
A bilateral contract in which one party (the protection buyer) makes periodic payments to the protection seller. In return, the protection seller compensates the protection buyer for any loss on a par amount of a reference asset following a credit event.
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Delta
|
The factor by which an option price varies in relation to the price of the investment or asset into which it is convertible.
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Derivative
|
The right or obligation to purchase or sell an equity interest at some future time. Futures, options and warrants, are examples of derivative instruments, which are normally purchased on margin.
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Designated
Territory
|
A location recognised by the UK’s Securities and Futures Authority (SFA) as having investor protection arrangements at least equivalent to those in the UK.
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Diluted Net Asset
Value (go to top)
|
A means of calculating a company’s net asset value having factored in outstanding convertible loan stocks, warrants or options and assuming that shareholders have exercised their right to convert or subscribe to the aforementioned, thus increasing the number of shares among which the assets are now divided.
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|
Directional Investing
|
Investment which is partly or entirely on the long side and is therefore expected to have higher correlation to market direction. See also Long-only Strategy.
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Discount Broker
|
A broker who provides a "no-frills" service for buying and selling securities. In practice, this means that the commission rates charged are lower, as no investment advice, analysis or research is offered.
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|
Discount/Premium
|
The difference between the market price and the net asset value (NAV) of an investment company’s ordinary shares. If the market price is less than the NAV per share, the shares are standing at a discount; if the market price is greater than the NAV, the shares are trading at a premium. The discount or premium is expressed as a percentage of the NAV.
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|
1) An investment manager who weighs up fundamental and technical analysis in reaching an investment decision. They are less quantitative in focus than systematic managers. See also Managed Futures. 2) An investment manager to whom the client has given full discretion or control over investment decision making.
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|
Distressed Securities
|
A type of event-driven hedge fund investment strategy. Fund managers invest in the debt, equity or trade claims of companies in financial distress and generally bankruptcy. The securities of these companies typically trade at substantial discounts to par value. This attracts investors looking to exploit possible pricing inefficiencies should a turn-around materialise.
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Distributing Fund
|
A fund which distributes investment income or capital gain to shareholders.
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Distributor Status
|
A fund that pays out dividends equal to at least 85 percent of the fund’s income, which are taxed as if they were capital, by the Inland Revenue in the UK.
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|
Distributor
Promoter
Marketer
(go to top)
|
An organisation which buys or sells shares of a fund through a custodian and distributes market information about the fund to the investing public. The fund distributor may be the investment manager of the fund as well.
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Diversification
|
Minimisation of non-systematic portfolio risk by investing assets in several uncorrelated securities and investment categories.
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Dividend
|
That part of a company’s annual distributable profits which is paid to the shareholders, usually expressed as an amount per share.
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Dividend Yield
|
Total cash dividends paid as a percent of market capitalisation at the end of the period.
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Dollar-Cost
Averaging
(go to top)
|
The practice of investing equal amounts of money at regular intervals regardless of whether securities markets are moving up or down. This procedure reduces the average share costs to the investor who acquires more shares during the periods of lower security prices and fewer shares in periods of higher prices.
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Domicile
|
Where funds are registered, i.e. based for tax and regulatory purposes.
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|
Downside
Deviation (DD)
|
Standard deviation measures risk as dispersion on either side of the mean and therefore does not distinguish between "good" volatility and "bad" volatility. To assist in the analysis of losses from portfolios, a measure that allows direct treatment of "bad" volatility is required. Downside deviation (see also Sortino Ratio) is commonly used.
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Drawdown
|
See Maximum Drawdown.
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|
|
Total earnings of a company divided by the number of its shares. |
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Earnings Yield
|
Earnings per share divided by the market price per share. |
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|
A curve which describes the optimal combination of a portfolio of assets to achieve given levels of return, with the least amount of risk. |
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Emerging
Markets
|
A generally long-only investment strategy which entails investing in geographic regions that have undeveloped capital markets and exhibit high grow rates and high rates of inflation. Investing in emerging markets can be very volatile, and may also involve currency risk, political risk, and liquidity risk. |
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Entrance
Frequency
|
The frequency at which a limited partnership’s shares are offered to investors. |
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Equalisation
Amounts
|
Distributions to compensate for the fact that performance-based fees may differ among investors depending on the timing of their entry into a fund. |
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Equity (go to top)
|
The money value of "shares" and "stock", usually meaning ordinary or preferred shares of a company. These shares represent an ownership interest in a company and may have voting or non-voting privileges. |
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Equity Market
Neutral
|
A hedge fund investment strategy designed to exploit equity market inefficiencies. It usually involves being simultaneously long and short matched equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta or currency neutral, or both. Well designed portfolios typically control for industry, sector and market capitalisation. |
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Eurobond
|
Corporate or government bonds issued in a currency other than the national currency and floated outside the issuer’s home market. |
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European Equity Hedge
|
A hedge fund investment strategy based around long or short positions in European equities. Although generally directional in nature, these strategies attempt to hedge out some market risk to achieve an absolute return objective. |
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|
A hedge fund investment strategy designed to exploit an actual or anticipated occurrence of an event such as a merger, corporate restructuring or bankruptcy. To be profitable, such investments must correctly predict the likelihood of an event being completed as well as the time frame in which it will occur. Typical strategies include merger arbitrage, distressed securities arbitrage and most approaches incorporating the term "special situations". |
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Exchange Rate
Per US Dollar
|
The exchange rate at the end of the period against the US dollar. |
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Execution Only
|
A service whereby a broker simply executes his client’s orders, without giving any advice. This is the cheapest form of brokerage and is often done by phone. Known in America as discount brokerage. |
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Exit Catalyst
|
An event that a distressed securities specialist expects to change the market’s perception and value of a distressed company. |
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FCP (go to top)
|
Fonds common de placement. A Luxembourg collective investment contractual structure. This type of fund is managed by a separate management company. |
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Federal Reserve
|
The American central bank. |
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Feeder Fund
|
A mutual unit fund which invests only in the shares of other mutual/unit trust funds. |
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Financial Futures Contract
|
An agreement to buy or sell a standard quantity of a specific financial instrument at a future date and at a price agreed between the parties, to take place on the floor of an organised exchange through open outcry (i.e. the method of dealing whereby bids and offers are audible to all other market participants on the floor of the exchange). |
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|
A hedge fund investment strategy that seeks to exploit pricing inefficiencies in fixed income securities and their derivative instruments. Typical investment will involve long a fixed income security or related instrument that is perceived to be undervalued, and short a similar, related fixed income security or related instrument. |
|
Fixed Income Directional
|
A hedge fund investment strategy based around long or short positions in fixed income securities. |
|
Fixed Interest
Funds
|
Funds investing in excess of 70 percent of their assets in fixed interest securities (corporate, government, index-linked, etc.) with a maturity of 3 years or more. |
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Floating Rate Securities
|
Interest bearing securities where the interest rate may alter over time. |
|
Floating-Rate Note
|
A bond that makes periodic coupon payments linked to a variable interest rate index. The bond usually pays an additional "spread" that is intended to bring the price of the bond to (or close to) par on the issue date of the bond. |
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|
In the foreign exchange market, this is a tailor made deal where an investor agrees to buy or sell an amount of currency at a given date. The arrangement is calculated from the current or spot price, with an adjustment for the varying interest rate to cover the period agreed. Forwards are good for investors who need unusual deals which are not negotiable. |
|
Forward Yield
Curve Arbitrage
|
See Fixed Income Arbitrage. |
|
Fulcrum Rule
|
US mutual fund performance-based fee structures must satisfy the ’fulcrum’ rule. That is, gains and losses must have a symmetric effect, in the sense that the same amount of over- and underperformance relative to a benchmark must result in the same amount of positive and negative incentive fees for a mutual fund manager. Hedge fund managers are not subject to the ’fulcrum’ rule, or for that matter, any rules other than what the investors would bear. |
|
Fund Manager
|
A company which manages the day-today affairs of a mutual or unit/trust fund. The investment manager and fund manager may be one and the same person. |
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|
A fund whose portfolio is made up of allocations to other funds. The portfolio will typically diversify across a variety of investment managers and investment strategies. |
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Fundamental Investment
Analysis
|
Analysis of the balance sheet and income statements of companies in order to forecast their future stock price movements. |
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Future
|
A contract to buy or sell standardised amounts of a commodity or financial instrument at a specific date in the future. Unlike forwards, futures are negotiable, and because they are standardised they approximate to what many investors want. The aim of this type of instrument is to make futures markets liquid, so that dealing is easy. Futures prices are related to the current price of the commodity, adjusted for the cost of carry. |
G8 Nations
|
The major industrialised nations of the world: USA, Japan, Germany, UK, France, Italy, Canada and the Russian Federation. |
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Gamma (go to top)
|
The rate at which a Delta changes over time. |
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Gearing (Leverage)
|
The effect that borrowing has on the equity capital of a company. If the assets bought with the funds borrowed appreciate in value, the excess of value over funds borrowed will accrue to the equity shareholder, thus augmenting, or gearing up, capital value. Gearing works in the same way but in the opposite direction if the asset values fall. |
|
General Partner
|
The managing partner of a limited partnership, responsible for its operation. The general partner’s liability is unlimited. |
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Geographical Spread
|
The distribution of the investments in fund’s portfolio over different parts of the world, either by country or by larger area. |
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Gilts (go to top)
|
Bonds issued by the British government and known as gilts or gilt-edged securities. |
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Global Bond Funds
|
Funds that invest in the debt securities of companies, and countries worldwide, including the US. |
|
Global Equity Funds
|
Funds that invest in securities traded worldwide, including the US, offering investors an easy avenue to investing abroad. The funds’ managers handle the trading and record keeping details and deal with differences in currencies, language, time zones, laws and regulations, business customs and practices. In addition to another layer of diversification, global funds add another layer of exchange-rate risk. |
|
Global Macro
|
An opportunistic hedge fund investment strategy that seeks to profit by making leveraged bets on anticipated price movements of global stock markets, interest rates, foreign exchange rates, and physical commodities. The portfolios of these funds can include stocks, bonds, currencies, and commodities in the form of cash or derivatives instruments. |
|
GNMA (Jinni Am Funds)
|
Invest in mortgage securities backed by the Government National Mortgage Associating (GNMA). |
|
|
Bonds and other debt issued by government or governmental organisations and agencies. |
|
Gross Exposure
|
A portfolio’s stated exposure when its long and short positions are added together. For example, if a fund is 100% long and 25% short, then its gross exposure is 125%. See also net exposure. |
|
Growth Funds
|
Funds that invest in the common stock of well-established companies to produce an increase in the value of their investments (capital gains) rather than a flow of dividends. Investors who buy a growth fund are more interested in seeing the fund’s share price rise than in receiving income from dividends. |
|
Growth Stocks
|
Stocks which have exhibited strong earnings or growth or are expected to show this in the future. Growth stocks will typically have a higher price/earnings ratio because of their higher expected earnings growth. See also Value Stocks. |
|
Growth Style
|
An investment strategy focused on growth stocks. |
|
Guaranteed Funds (go to top)
|
A type of mutual/unit fund which usually offers the potential of gains plus the guarantee of a return of 90-100 percent of the original investment at some time in the future. Popular in Hong Kong. |
|
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The objective of this type of fund is to achieve capital growth by investing in a diversified portfolio of high quality bonds and other securitised debt instruments. The fund will usually invest solely in bonds issued in countries which are deemed by the directors to be hard currency countries such as Germany, Switzerland, the Netherlands and Austria. |
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Hard Currency Growth Companies Fund
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The objective of this type of fund is to produce long-term capital growth by investing in a diversified portfolio of shares of companies whose shares are quoted on a regulated market and which are domiciled in countries which are deemed to have hard currencies such as Germany, Switzerland, the Netherlands, and Austria. |
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Hedge Directional Strategies
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A hedge fund investment strategy designed around buying and/or selling a security which, based primarily on fundamental analysis or technical research, is believed to be significantly mispriced in relation to its potential value. Such strategies tend to concentrate on a specific company, industry, or country. |
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Investment partnerships that have an absolute return performance objective that is not index or benchmark based. Hedge fund strategies generally allow a manager to be active on both the long and short sides of the markets and compensate the manager with performance related fees. |
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Hedging
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A strategy for reducing risk by purchasing an investment (or currency) in opposition to another investment (currency) so as to counter any loss made by either. Hedging is used to reduce the risk of loss through adverse movement in interest rates, equity markets, share prices or currency rates. |
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High Watermark
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A mechanism that ensures a fund only takes fees on profits unique to an individual investment. For example: a US$1,000,000 investment is made in year 1 and the fund declines by 50%, leaving US$500,000 in the fund. In year 2, the fund returns 100%, bring the investment value back to US$1,000,000. If a fund has a high water mark, it will not take incentive fees on the return in year 2, since the investment has never grown. The fund will only take incentive fees if the investment grows above the initial level of US$1,000,000. |
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A type of event driven hedge fund investment strategy focusing on sub-investment grade fixed-income securities (also known as "junk bonds") of companies that show significant upside potential. |
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High Yield Bond
Funds
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These maintain at least two-thirds of their portfolio in lower-rated corporate bonds (BAA or lower by Moody’s rating service and BBB or lower by Standard & Poor’s rating service). In return for a generally higher yield, investors must bear a greater degree of risk than for higher-rated bonds. |
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Hurdle Rate
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The minimum investment return a fund must exceed before a performance allocation/incentive fee can be taken. For example, if a fund has a hurdle rate of 10%, and the fund returns 25% for the year, the fund will only take incentive fees on the 15% return above the hurdle rate. See also High Water Mark. |
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Incentive Fee
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The fee on new profits earned by the fund for the period. For example, if the initial investment was US$1,000,000 and the fund returned 25% during the period (creating profits of US$250,000) and the fund has an incentive fee of 20%, then the fund receives 20% of the US$250,000 in profits, or US$50,000. |
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Income Equity Funds (go to top)
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Funds which seek to generate a high level of current income for their unit holders by investing primarily in equity securities of companies with good dividend-paying records. |
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Income-Bond Funds
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Funds that seek to generate a high level of current income for their shareholders by investing at all times in a mix of corporate and government bonds. |
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Income-Mixed Funds
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Funds that seek to generate a high level of current income for their shareholders by investing in income producing securities, being both equities and/or debt instruments. |
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Index Funds
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A type of mutual fund which attempts to achieve a performance similar to that stated in an index such as the S & P 500 Index, the Nikkei 225 or the FTSE. The purpose of this fund is to realize an investment return at least equal to the broad market covered by the indices while reducing management costs. |
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A security such as index linked gilts whose value and/or interest payments are linked to inflation. |
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Index Swap
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A bilateral contract in which one party pays to the other the return on a specified index (usually representing a large universe of bonds). |
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Initial Fee
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A front-end fee levied by some funds on new clients, which is normally deducted from the initial investment and expressed as a percentage of the invested amount out of which an intermediary is paid if applicable. |
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Initiation
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The conversion of an investment trust company into a unit trust. |
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Interest Rate Futures
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Contracts on certain three-month interest rates or debt instruments that are available in a variety of currencies and are traded on major futures exchanges throughout the world. |
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Interest Rate Swap (go to top)
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A bilateral derivative contract involving the exchange of fixed-rate payments for floating rate payments typically linked to the LIBOR interest rate index. Typically used to hedge interest rate risk. |
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Interim
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Formal statement of unaudited results for the first half of the company’s financial year. |
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International Credit Spreads
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See TED spreads. |
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Investment Adviser
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An individual or an organisation which provides investment advice for a fee. |
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Investment Manager
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An individual who is responsible for the selection and allocation of investment securities. |
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Investment Objective
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The goal, such as long-term capital growth, current income, growth and income, which an investor or a mutual fund/unit trust pursues. Each fund’s objective is stated in its prospectus. |
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A close-ended, public limited company which invests in the equity of other companies. An investment trust is used by small investors to gain a wide spread of investments easily. Also called an investment fund in the US and normally listed on an exchange. |
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Jones Model
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A "classic" approach to hedge fund investment named after the first hedge fund on record, the Jones Hedge Fund, established by Alfred Winslow Jones in 1949. In an attempt to reduce market risk and focus on stock selection, the fund invested both long and short. It also employed leverage and fee-based compensation. See also Long/Short Equity. |
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Junk Bonds
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Corporate bonds of sub-investment grade (credit rating of BB or lower), also known as high yield bonds. Usually issued by companies without long track records of sales or earnings, or by those with questionable credit standing. |
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Large Cap Securities
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Equity securities with a relatively large market capitalisation, usually over $5 billion. |
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Laufzeitfonds (go to top)
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European Laufzeit funds terminate at the end of the Laufzeit or running period. Initially these were bond funds, so there is no risk involved for the investor because the fund manager buys bonds that terminate around the end of the Laufzeit and yield the amount invested plus interest earned during the period. Usually these funds are closed several weeks or months after launch, so there is only a bid price available once it is closed. Nevertheless, the investor can sell the fund at any time during that period. |
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LDC Debt
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Debt securities issued by lesser-developed countries. |
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Leverage
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The use of borrowed funds to increase the amount invested in a particular position. Investors use leverage when they believe that the return from the position will exceed the cost of the borrowed funds. Hedge fund managers who target very small price discrepancies or spreads will often use leverage to enhance the returns from these discrepancies. This magnifies the risk of the overall strategy. It also gives the lender power over the disposition of the investment portfolio, either in the form of increased margin requirements or even forcing a partial or complete liquidation of the portfolio in the event of averse market movements. |
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LIBOR
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The London Inter-Bank Offered Rate. This is an interest rate at which highly rated (typically AA-rated) banks can borrow. It is calculated by daily polling of the London branches of 16 banks to determine the rate at which they can borrow for various terms and in various currencies. For each term and currency, the received rates are ranked in ascending order, the top and bottom four are rejected, and an average of the remaining eight is taken. |
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Liquid (go to top)
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A market where there are many buyers and sellers (and consequently it is easy to deal) is described as liquid. Investors who hold cash are said to be liquid, and those who have sold their securities for cash have gone liquid. |
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Listing
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For shares (or bonds) to be traded officially on a stock market, they must be listed, which is an endorsement from the market authorities that the securities and their issuer meet certain criteria. |
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Long Biased Managers
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Hedge fund managers with a long-directional market philosophy. Short selling and hedging are not the main elements of their strategy. |
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Long Bond
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A gilt or other bond with a term of 15 years or more before it can be redeemed . |
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Long Positions
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An investor who owns an asset has a "long position" in that asset. |
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A hedge fund investment strategy that combines long and short positions in equity and fixed income securities to reduce, but not necessarily eliminate, exposure to the market. These strategies are somewhat directional and their returns usually exhibit higher correlations with traditional markets than those of Relative Value or Event Driven approaches. |
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Long/Short Equity
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A directional hedge fund strategy involving both long and short equity-oriented investment. Managers have the ability to shift from value to growth, from small to medium to large capitalisation stocks, and from a net long position to a net short position. Managers may use futures and options to hedge. The focus may be regional, such as long/short US or European equity, or sector specific, such as long and short technology or healthcare stocks. See also Long/Short Hedged, Jones Model |
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Long/Short Hedged
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See Hedge directional strategies. |
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Long-only Leveraged
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A traditional equity investment strategy structured somewhat like a hedge fund, using leverage and permitting its managers to collect an incentive fee. |
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The "traditional" approach to investment, constructing portfolios of long-only securities (eg equities and bonds). |
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Loss Carryforward
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Synonymous with high watermark. |
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Luxembourg
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Funds registered in Luxembourg can be readily marketed in the UK under the UCITS directive and pay income and capital gains gross to investors. |
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Managed Futures
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The hedge fund investment strategy employed by Commodity Trading Advisors, or CTAs, investing in listed financial and commodity futures markets and currency markets. Trading disciplines can be either systematic or discretionary. Systematic traders tend to use price and market specific information (often technical) to make trading decisions, while discretionary managers use a judgmental approach. |
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Management Charge (go to top)
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The cost of running a fund, charged annually against its income. The current average level is approximately 0.5 percent-2 percent of assets under management. The expenses which make up this total usually include the cost of investment management and administration, directors’ fees, audit fees and share registration expenses. |
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Management Company
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A company employed by one or more trusts to provide investment management and some or all of the following services: administration, secretarial, registration, accountancy and research. |
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Margin
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1. The minimum amount that a client must deposit in cash or securities when borrowing to buy securities or trade in futures and options. 2. The difference in the purchase and sale price of a security. |
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Market Capitalisation
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The value of a company on the stock market, calculated by multiplying the number of its issued ordinary shares by its current market price. |
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Market Neutral (go to top)
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Any hedge fund investment strategy that attempts to eliminate market risk and be profitable in any market condition. See also Relative Value. |
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Market Timer
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A manager attempting to ’time the market’ by allocating assets among investments, primarily switching between mutual funds and money markets. |
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Maturity
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Another word for redemption. |
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Maximum Drawdown
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The worst peak to trough return that an investor could have incurred over any time period. |
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Mean Reversion
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The mathematical premise that all prices will eventually move back towards the mean or average return. |
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Medium- or Mid-Cap Securities
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Equity securities with a mid-level market capitalisation, usually between $1 billion and $5 billion. |
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Medium Term Bond (go to top)
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A bond with between five and fifteen years to redemption. |
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Minimal Acceptable Return (MAR)
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The minimum return an investor requires to accomplish a particular investment objective. Risk is associated only with bad outcomes; therefore, only returns below the MAR are associated with risk. The MAR thus separates "good" volatility (above the MAR) from "bad" volatility (below the MAR). See Sortino ratio. |
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Minimum Account Size
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The minimum initial investment an investor must allocate in order to enlist the services of an investment manager. |
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Minimum Additional Investment
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The minimum incremental capital allocation an investment manager allows to an existing investor. |
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Mixed
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See Balanced Funds. |
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Money Manager
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Synonymous with portfolio/investment manager. |
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Funds that invest solely in money market or cash instruments with durations ranging from overnight to three months, or managed currency funds with an objective of maximizing the value of liquid assets via the management of currency exposure. Investments will normally be held in bank deposits, short-term monetary investments and forward currency contracts. |
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Mortgage-Backed Securities (MBS) Arbitrage
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A hedge fund investment strategy designed to benefit from relative mispricing in the mortgage-backed security sector while neutralising interest rate risk. See also fixed income arbitrage. |
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Mortgage-Backed Security
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A security backed by mortgage debt obligations. Its principal amount is usually government guaranteed. Householders’ principal and interest payments pass to investors via the originating bank, through a government agency or investment bank. |
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Multi Strategy
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An approach to hedge fund investment that allocates capital to a variety of strategies. |
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An open-ended investment company (unit trust) that pools money from shareholders and invests in a variety of securities, including, stocks, bonds, and money market instruments. A mutual fund is obligated to buy back (redeem) its shares at their current net asset value; which depends on the market value of the fund’s portfolio securities at the time of redemption. |
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NAV
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"Net asset value" per share - the market value of a fund share. NAV is calculated by summing the closing market value of all securities within a portfolio with all other assets such as cash, subtracting all liabilities (including fees and expenses), then dividing the result by the total number of shares outstanding. |
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Negotiable
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A security which can be bought and sold is said to be negotiable. It is a flexible investment because the holder is not committed to owning it for their full term. |
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Net Exposure
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The exposure level of the fund to the market. It is calculated by subtracting the short percentage from the long percentage. For example, if a fund is 100% long and 25% short, then its net exposure is 75%. |
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Net rate of return
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The percentage movement in the value of a fund over a given period, after accounting for all fees and expenses. |
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A security being issued to the public for the first time. |
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No-load Fund
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A mutual fund that does not charge an initial or a redemption fee. The term also refers to a fund selling its shares at unit trust net-asset value without the addition of sales charges. |
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Nominee
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A legal agreement where a person or a firm holds shares on behalf of another person or institution. |
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Non-directional
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An investment strategy with absolute return objectives, irrespective of market movements. |
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Offer
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The price at which a market maker sells shares; also known as the "ask". Market makers quote two prices - a bid where they buy and an offer where they sell. |
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Offer Price
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The price at which mutual fund/unit shares are sold to shareholders. The offer price may be equal to the bid price, or higher. |
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Offshore Hedge Fund (go to top)
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Hedge funds that are domiciled in offshore financial centres. |
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Offshore Territories
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Generally refers to jurisdictions which have low or no tax regimes for investment schemes, and where investment funds are registered for sale to investors resident in other countries. |
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Open-ended Funds
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A fund or unit trust that can grow or shrink investable capital on demand by issuing new units or shares. Open-ended funds can either be formed as trusts, as with unit trusts, or assume a corporate structure such as open-ended investment companies (so-called OEICs). |
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Opportunistic
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An investment strategy that seeks to profit from pricing discrepancies resulting from corporate "event" transactions, such as mergers & acquisitions or bankruptcies. See also Event Driven. |
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Option
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An instrument giving the owner the right to buy or sell an asset at a given price within a given period of time. The price at which the option owner can buy or sell is called the striking price. |
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Funds that seek to generate a higher return by investing primarily in dividend-paying common stocks on which call options are traded. Income generally consists of dividends, premiums from writing options, net short-term gains from the sale of portfolio securities on exercises of options or otherwise, and any profits from closing purchase transactions. |
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Options Arbitrage
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A hedge fund investment strategy designed to capture the spread between similar options through inefficiencies in the market. S |