Hedge Fund Glossary
We hope you find this glossary of common terms used in the hedge fund industry to be useful. Note that in some cases, terms cited here include a link for more information, and these links will take you to other sites not controlled by Morgan Group. If you have a suggestion or comment on this glossary, please contact us.
- Accredited Investors
- A term used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by certain government filings.
(Read More from U.S. Securities and Exchange Commission)
- Administrator
- A hedge fund administrator is generally an outside organization independent from the fund that services clients and investors and provides financial, tax and compliance reporting. The administrator calculates net asset values and manages money inflows and outflows.
- Alpha
- Measures risk-adjusted excess rate of return relative to a benchmark. It shows the return achieved over and above the return that results from the correlation between the fund in question and the market benchmark, in effect measuring the "skill" of the fund manager.
(Read More from University of Massachusetts) - Alternative Investments
- This term encompasses any non-traditional asset class. For example they include venture capital, private equity, hedge funds, managed futures and real estate.
- Arbitrage
- Refers to the exploitation of temporary price differences in securities that exist as a result of market inefficiencies. The same securities, or related asset, are bought on the market offering a lower price and sold on the market offering a higher price.
(Read More from Wikipedia) - Average Annual Return
- Cumulative gains and losses divided by the number of years of an investment's life, with compounding taken into account. The measure is used to compare returns on investments for periods ranging from partial to multiple years.
- Beta
- Measures the sensitivity of an investment, such as an investment fund, to fluctuations in the market, as represented by the relevant market benchmark. A Beta of one means the portfolio moves in tandem with the benchmark, a Beta of more than one means the fund gains (or loses) more than the index does, while a Beta of less than one means that the fund is less sensitive to market movements.
(Read More from Investment FAQ) - Fund of Hedge Funds
- A fund of funds is a one that invests in other hedge funds. The fund of funds manager spends considerable time evaluating, identifying strategies and selecting the hedge funds to implement them. Fund of funds may control risk by achieving manager diversity.
(Read More from Hedge Fund Center) - Hedge Fund
- Like mutual funds, hedge funds pool investors' money and invest those funds in financial instruments in an effort to make a positive return. However, hedge funds are subject to fewer regulatory controls, and as such, hedge funds can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk. Just like there are many types of mutual funds, hedge fund strategies vary enormously and it is no more appropriate to group the performance of "hedge funds" than it is to group the perforamance of "mutual funds" -- rather, it is important to evalute each hedge fund on its own merits. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions.
(Read More from Magnum Funds) - High Water Mark
- Principle whereby the manager of a hedge fund does not receive an incentive fee based on a percentage of the growth in the fund's value until any losses incurred in the previous year have been made up during the current year. As each investor may enter the fund at different times, the high water mark provision must be calculated individually for each investor.
- Incentive Fee
- The fee - typically 20% - that a fund manager charges on gains earned during a given 12 month period and collected either on a monthly or a quarterly basis.
- Inception Date
- The date in which the fund began trading.
- Management Fee
- The fee charged by a hedge fund manager to cover operating expenses. Typically the fee ranges from an annual 1.0% to 2.0% of the investor's entire holdings in the fund, collected either on a monthly or a quarterly basis.
- Market Neutral
- An investment strategy that attempts to eliminate market risk and to be profitable in any market condition, typically by hedging. A portfolio is truly market neutral if it exhibits zero correlation with the unwanted source of risk. For example, the "market neutrality" of a US equities fund may be measured based on its correlation to a major US equities index such as the S&P 500.
(Read More from Magnum Funds) - Maximum Drawdown
- The cumulative percentage loss that a fund incurs from its peak net asset value to its lowest value, before regaining its peak net asset value. If one were to view a graph of a fund's net asset value over time, the maximum drawdown would by the greatest percentage drop "valley" between "peaks."
- R-Squared
- Measures that represents the percentage of a fund's or of a security's movements that are explained by movements in a benchmark index. In other words, "How correlated is the movement of the fund to the movement of the index?" For fixed-income securities the benchmark is often the T-bill, and for equities the benchmark is often the S&P 500 index. A value of 1.0 indicates perfect correlation with the benchmark, while a value of 0.0 indicates no correlation with the benchmark.
(Read More from Investopedia) - Redemption Notice Period
- The required period of time prior to an intended redemption that a written request for redemption must be made. Many hedge funds require investors to give this advance notice for a planned redemption.
- Redemptions
- Partial or whole liquidation of interests in an investment fund.
- Relative Value Strategy
- This investment strategy exploits price differences of various financial instruments, which can be incorrectly valued relative to another financial instrument. Examples of Relative Value strategies are Fixed Income Arbitrage, Convertible Arbitrage and Equity Market Neutral.
- Sharpe Ratio
- Measures risk-adjusted performance of an investment asset, or a trading strategy. It characterizes how well the return of an asset compensates the investor for the risk taken. Fund managers commonly strive to achieve high Sharpe Ratios.
(Read More from William F. Sharpe, Stanford University) - Sortino Ratio
- A variation of the Sharpe Ratio that was developed to differentiate between good and bad volatility, using downside deviation instead of standard deviation. The Sortino ratio is the excess return over risk-free rate over the downside semi-variance, so it measures the return to "bad" volatility. This ratio allows investors to assess risk in a better manner than simply looking at excess returns to total volatility (i.e. Sharpe Ratio), since such a measure does not consider how often the price of the security rises as opposed to how often it falls. That is, the Sortino ratio does not penalize a fund for its upside volatility.
(Read More from Hedge Fund Center) - Standard Deviation
- Measures the volatility or deviation of returns around the portfolios mean-average return. The standard deviation is the amount of swing in performance that an investment can be expected to have from year to year. The further the variation from the average return, the higher the standard deviation. A standard deviation of zero would mean an investment has a return rate that never varies, like a bank account paying compound interest at a guaranteed rate.
(Read More from Ric Edelman) - Subscription
- In the fund business, subscription means the acquisition of fund units (shares). An investor is said to "subscribe" to the fund, and legal documents enabling the transaction are referred to as "subscription documents."
- Volatility arbitrage
- In "vol" trading, managers buy options and short the underlying stock, keeping in mind the delta or the correlation between moves in the option price and the stock price. Conversely, traders can earn a premium by selling the option and buying the stock. The strategy is driven by differences between the option's implied volatility, and a forecast of the underlier's future realized volatility
(Read More from Wikipedia)