MBAHFO > Glossary of Terms

Glossary of Terms

A | B | C | D | E | F | G | H | I | J | K | L | M

N | O | P | Q | R | S | T | U | V | W | X | Y | Z

A    Top

Additions

Frequency at which fund additions are accepted by the fund.

Administrator

The offshore fund entity that manages the back office work and individual accounts for the fund.

Alpha

Alpha is the measure of a fund's average performance independent of the market, (i.e. if the market return was zero.) For example, if a fund has an alpha of 2.0, and the market return was 0% for a given month, then the fund would, on average, return 2% for the month.

Auditor

A certified public accountant who examines a company's books according to a set of procedures and issues a report.

AUM

Assets Under Management.

Average Annual Return or Average Rolling 12 Month Return

The average of the rolling 12 month performance periods of the fund. For example. If a fund begins in January 1997, and it is currently March 1998, then there are four rolling 12 month periods for the fund. (The first is January 1997 - December 1997, the next is February 1997 - January 1998, the next is March 1997 - February 1998, and the last is April 1997 - March 1998.) The average annual return is the average of the four rolling 12 month periods. The average annual return might not match an annualized calculation of the monthly return.

Average Monthly Gain

The average of the profitable months of the fund.

Average Monthly Loss

The average of the negative months of the fund.

Average Monthly Return

The average of all the monthly performance numbers of the fund.

Average Number of Positions

The number of securities that a fund holds on any given day.

Average Portfolio Turnover

The percentage of the portfolio that is bought and sold each year.

B    Top

Benchmark for Correlation Values

The benchmark that the fund has chosen to run correlation values such as alpha, beta, R and R squared.

Benchmark for Graphing

The benchmark that the fund has chosen to graph itself against.

Beta

Beta is the measure of a fund's volatility relative to the market. (Almost all fund managers correlate themselves to the S&P 500). A beta of greater than 1.0 indicates that the fund is more volatile than the market, and less than 1.0 is less volatile than the market. For example, if the market rises 1% and a fund has a beta greater than 2.5, the fund will rise, on average, 2.5%. For a fund with a beta of 0.4, if the market rises 1%, the fund will rise on average, 0.4%. The relationship is the same in a falling market. (Please note that funds can have a negative beta, meaning that on average they rise when the market falls and vice versa).

Bottom-up investing

An approach to investing which seeks to identify well-performing individual securities before considering the impact of economic trends.

C    Top

Capital structure arbitrage

Investment strategy that seeks to exploit pricing inefficiencies in a firm's capital structure. Strategy will entail purchasing the undervalued security, and selling the overvalued, expecting the pricing disparity between the two to close out.

Compounded Monthly Return

The compounded monthly return is the return that if compounded over the life of the fund would lead to the total return of the fund. For example, if a fund has 10 months of return equaling 100% as a total compounded return. The compounded monthly return would be 7.18%.

Convertible arbitrage

Investment strategy that seeks to exploit pricing inefficiencies between a convertible bond and the underlying stock. Manager will typically long the convertible bond and short the underlying stock.

Corporate debt

Non-government-issued interest-bearing or discounted debt instrument that obligates the issuing corporation to pay the bondholder a specified sum of money, at specific intervals, and to repay the principal amount of the loan at maturity.

Current Leverage

The amount of leverage currently used by the fund as a percentage of the fund. For example, if the fund has $1,000,000 and borrowing another $2,000,000, to bring the total dollars invested to $3,000,000, then the leverage used is 200%.

Current Net Exposure

The exposure level of the fund to the market at the present time. It is calculated by subtracting the short percentage from the long percentage. For example, if a fund is 100% long and 25% short, then the net exposure is 75%.

D    Top

Distressed securities investing

Investment strategy focusing on troubled or restructuring companies at deep discounts through stocks, fixed income, bank debt or trade claims. Seeks to exploit possible pricing inefficiencies caused by the lack of large institutional investor participation.

Diversification

Minimizing of non-systematic portfolio risk by investing assets in several securities and investment categories with low correlation between each other.

E    Top

Emerging markets investing

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.

Entrance frequency

Frequency of limited partnership's shares offerings.

Equalization amounts

Distribution to limited partnership interests according to highwater provisions, to properly account for performance-based fees, which may differ among investors, depending on the investor's entry points into a fund.

Equity market neutral investing

Equity investing on both the long and short side, with equal dollar amounts. Will attempt to neutralize market risk, and isolate a manager's alpha, to achieve absolute returns.

European equity hedge

Hedged European equity investing on both the long and short side. Although generally directional in nature, will attempt to hedge out some market risk, and achieve some level of absolute return objectives.

Event driven investing

Investment strategy seeking to identify and exploit pricing inefficiencies that have been caused by some sort of corporate event, such as a merger, spinoff, distressed situation, or recapitalization.

F    Top

Fixed income arbitrage

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

Fixed income investing on the long or short side, based on a manager's view of current market pricing of fixed income securities.

Fund of funds

Investment partnership that invests in a series of other funds. Portfolio will typically diversify across a variety of investment managers, investment strategies, and subcategories.

Fundamental investment analysis

Analysis of the balance sheet and income statements of companies in order to forecast their future stock price movements.

G    Top

General partner

Managing partner of a limited partnership, who is responsible for the operation of the limited partnership. The general partner's liability is unlimited.

Global macro investing

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.

H    Top

High Water Mark

The assurance that a fund only takes fees on profits unique to an individual investment. For example, a $1,000,000 investment is made in year 1 and the fund declines by 50%, leaving $500,000 in the fund. In year 2, the fund returns 100%, bring the investment value back to $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 $1,000,000.

Highest 12 Month Return

The best or highest 12 month period of a fund's performance.

Highest Monthly Return

The best or highest monthly return of the fund.

Hurdle Rate

The return above which a hedge fund manager begins taking incentive fees. 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.

I    Top

Incentive Fee

The fee on new profits earned by the fund for the period. For example, if the initial investment was $1,000,000 and the fund returned 25% during the period (creating profits of $250,000) and the fund has an incentive fee of 20%, then the fund receives 20% of the $250,000 in profits, or $50,000.

Inception Date

The date that the fund began trading.

Investment adviser

Individual or entity who provides investment advice for a fee. Registered Investment Advisers must register with the SEC and abide by the rules of the Investment Advisers Act.

Investment manager

Individual who is responsible for the selection and allocation of investment securities.

J    Top

Junk bonds

Corporate bonds with a 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.

L    Top

Large cap securities

Equity securities with relatively large market capitalization, usually over $5 billion (shares outstanding times price per share).

LDC debt

Debt securities issued by lesser-developed countries.

Lockup

Time period that initial investment cannot be redeemed from the fund.

Long biased managers

Investment managers with a long-directional market philosophy. Short selling and hedging are not the main components of their investment portfolio.

Longest Losing Streak

The number of consecutive months of negative performance.

Lowest Monthly Return

The lowest or worst monthly return of the fund.

Lowest 12 Month Return

The lowest or worst 12 month period of a fund's performance.

M    Top

Management company

A firm that, for a management fee, invests pools of capital, for the purpose of fulfilling a sought-after investment objective.

Management Fee

The fees taken by the manager on the entire asset level of the investment. For example, if at the end of the period, the investment is valued at $1,000,000, and the management fee is 1%, then the fees would be $10,000.

MAR ratio

A measurement of risk-adjusted rate of return that compares the rate of reward with degree of risk where the risk degree is measured by largest-ever-peak-to-valley decline in equity. The formula used is the average geometric annual return divided by maximum decline.

Market neutral investing

Investing in financial markets through a strategy that will result in an investment portfolio not correlated to overall market movements and insulated from systematic market risk.

Master-Feeder Fund

A typical structure for a hedge fund. It involves a master trading vehicle that is domiciled offshore. The master fund has 2 investors: Another offshore fund, and a US (usually Delaware) Limited Partnership. These two funds are the feeder funds. Investors invest in the feeder funds, which in turn invest all the money in the Master fund, which is traded by the manager.

Maximum Drawdown

The worst period of "peak to valley" performance for the fund, regardless of whether or not the drawdown consisted of consecutive months of negative performance.

Medium cap securities

Equity securities with a middle-level stock market capitalization. Mid-cap stocks will typically have between $1 billion and $5 billion in total market capitalization (shares outstanding times price per share).

Minimum account size

The minimum initial investment amount an investor must allocate in order to enlist the services of an investment manager, via a separate account, or a limited partnership interest.

Minimum additional investment

Minimum incremental capital allocation allowed to an existing investor.

Money manager

A portfolio/investment manager, the person ultimately responsible for a securities portfolio.

Mortgage-backed security

A pass-through security that aggregates a pool of mortgage-backed debt obligations. Mortgage-backed securities' principal amounts are usually government guaranteed; homeowners' principal and interest payments pass from the originating bank or savings and loan through a government agency or investment bank, to investors, net of a loan servicing fee payable to the originator.

Multi strategy

Investment philosophy allocating investment capital to a variety of investment strategies, although the fund is run by one management company.

N    Top

NAV

Net asset value per share--the market value of a fund share. Equals the closing market value of all securities within a portfolio plus all other assets such as cash, subtracting all liabilities (including fees and expenses), then dividing the result by the total number of shares outstanding.

Net rate of return

Percentage appreciation from the prior period, after accounting for all fees and expenses.

New issues

Stock or bond offering being issued to the public for the first time. Also known as "hot issue".

Non-directional

Investment strategy with absolute return objectives, irrespective of market movements.

O    Top

Opportunistic

Investment strategy that seeks to profit from pricing discrepancies resulting from corporate "event" transactions, such as mergers & acquisitions, spinoffs, bankruptcies, or recapitalizations. Also known as "event driven."

P    Top

Pairs trading

Non-directional relative value investment strategy that seeks to identify two companies with similar characteristics whose equity securities are currently trading at a price relationship that is out of their historical trading range. Investment strategy will entail buying the undervalued security, while short-selling the overvalued security.

Peak to Valley Drawdown

The worst period of return of the fund.

Percent Long

The percentage of the fund invested in long positions.

Percent Short

The percentage of the fund that is sold short.

Portfolio turnover

The number of times an average portfolio security is replaced during an accounting period, usually a year.

Prime broker

The principal brokerage firm an investment fund does business with.

Profitable Percentage

The percentage of monthly returns that the fund made money.

Pro-Forma

A monthly return that, for some reason, was not completed by the fund in the exact structure as it is now. Examples: 1. A fund manager who managers a master feeder structure does not have any money in the offshore fund, but since the offshore fund is simply an investor in the master fund, he reports the returns as pro-forma. 2. A fund manager runs managed accounts with the same exact strategy and fee structure as his new fund. He may list the performance of the managed accounts as pro forma, for while there was a real track record, it just was not in the fund structure. 3. A fund manager leaves his management company and brings the fund with him. He may report the performance under the old management company as pro-forma. 4. A fund of funds launches with 10 funds in the portfolio. It may report the historical results of the weighted funds as pro forma.

R    Top

R and R Squared

R and R Squared show if there is any correlation between the fund and the market. 1.0 is perfect correlation, 0.0 is absolutely no correlation and –1.0 is perfect negative correlation. The industry assumes that an R squared below 0.3 has no correlation to the market.

Rate of return

Percentage appreciation in market value for an investment security or security portfolio.

Redemptions

Frequency at which fund redemptions are accepted by the fund.

Relative value

Non-directional market neutral investment strategy that seeks to exploit pricing discrepancies between a pair of related securities. Strategy will entail buying the undervalued security and short selling the overvalued security.

Reporting Agent

Any third party that analyses and verifies the monthly returns of a fund.

Risk arbitrage

Relative value investment strategy that seeks to exploit pricing discrepancies in the equity securities of two companies involved in a merger-related transaction. Strategy will entail the purchase of a security of the company being acquired, along with a simultaneous sale in the acquiring company.

S    Top

Slots available

Refers to the number of partnership interests that are still available within an investment vehicle, as limited by the 1940 Investment Advisers Act.

Small cap

Securities in which the parent company's total stock market capitalization is less than $1 billion.

Soft commodities

Tropical commodities such as coffee, sugar and cocoa. In a broader sense may also include grains, oilseeds, cotton and orange juice. This category usually excludes metals, financial futures and livestock.

Sovereign debt

Fixed income security guaranteed by a foreign government.

Special situations investing

Investment strategy that seeks to profit from pricing discrepancies resulting from corporate "event" transactions, such as mergers & acquisitions, spinoffs, bankruptcies, or recapitalizations. Also known as "event driven."

Spin-off

A form of a corporate divestiture that results in a subsidiary or division becoming an independent company.

Standard Deviation or Average Standard Deviation

The Standard Deviation of monthly returns.

Rolling 12 Month Standard Deviation

Standard Deviation of Rolling 12 Month Returns.

Sharpe Ratio or Annualized Sharpe Ratio

Here are two ways of stating the same thing: The average monthly return minus the monthly risk free rate (we use 0.41%) divided by the Standard Deviation. We take that number and multiply it by the square root of 12 to annualize it. [(Average Monthly Return - Risk Free Rate (0.41%) / Standard Deviation] *12 to the 1/2 power.

Rolling 12 Month Sharpe Ratio

It is the same calculations as the above Sharpe ratio, except we use annual and rolling 12 month numbers. So, it's the Average Annual Return - the Annual risk free rate (5%) divided by the rolling 12 Month Standard Deviation.

Sharpe ratio

A key risk/reward ratio used by the industry, it compares the rate of reward with the risk of gaining that reward. The formula is annualized geometric rate of return minus rate of return on a risk-free investment divided by the annualized arithmetic standard deviation. [The numerator shows the reward for pure risk-taking, the denominator measures the volatility of monthly performance which is an indicator of risk. The higher the Sharpe ratio, the higher return per unit of risk. A Sharpe ratio of 1:1 or higher reflects that the rate of return is proportional or more proportional to the risk run in seeking that reward.] Developed by Professor William R. Sharpe of Standford University.

Sortino Ratio

The Sortino Ratio is similar to the Sharpe Ratio, except that instead of using standard deviation as the denominator, it uses Downside Deviation. The Sortino Ratio was developed to differentiate between “good” and “bad” volatility in the Sharpe Ratio. If a fund is volatile to the upside (which is generally a good thing) its Sharpe ratio would still be low. To quote the Sortino web site: “A comparable downside risk ratio that has come to be called the Sortino ratio has for the numerator the difference between the return on the portfolio and the MAR. The denominator for the Sharpe ratio is standard deviation, and for the Sortino ratio it is downside deviation." The MAR is the Minimum Acceptable Return (We are using 5%).

T    Top

Top down investing

An approach to investing in which an investor first looks at trends in the general economy, and next selects industries and then companies that should benefit from those trends.

Turnarounds

Favorable reversal in the fortunes of a company, a market, or the economy at large. Turnaround specialists seek to exploit market pricing inefficiencies in securities of companies that might be on the verge of a turnaround situation.

Typical Leverage

The amount of leverage typically used by the fund as a percentage of the fund. For example, if the fund has $1,000,000 and borrowing another $2,000,000, to bring the total dollars invested to $3,000,000, then the leverage used is 200%.

Typical Net Exposure

The exposure level of the fund to the market that the fund attempts to maintain over time. It is calculated by subtracting the short percentage from the long percentage. For example, if a fund is 100% long and 25% short, then the net exposure is 75%.

U    Top

Universe

A list of hedge fund managers (who have traded for 12 months during that year) that may be used to calculate percentiles of performance.