glossary of terms

  1. Alternative Asset Investor Types
  2. Hedge Funds
    • – Structures
    • – Performance
    • – Strategies
    • – Benchmark Indices
    • – Investment Methodology
  3. Fund Term & Conditions

1. alternative asset investor types

Asset manager

Provides investment management and consultancy to a range of investors. The asset manager will invest the pooled funds of its clients in a diverse range of asset classes, minimizing risk while maximizing return.

Bank

A financial institution in which money is kept for commercial or savings purposes or is invested, used for loans or exchanged. It mainly acts as a payment agent for its customers to lend and borrow money, as well as provide a variety of financial services.

Fund of Funds Manager

Specialist fund manager, raising funds from the capital of institutional investors with which investments in other private capital funds are made. It may provide exposure to funds that would otherwise be inaccessible to smaller investors.

Investment Bank

An institution that acts as an agent or underwriter for corporations and governments issuing securities. Some also provide broker/dealer operations, as well as offer advisory services to investors. It facilitates mergers and acquisitions, private equity placements and corporate restructuring.

Investment Company

Invests the pooled capital of its shareholders in a variety of asset classes. Investment companies take three forms: open-ended investment companies (mutual funds), closed-end investment companies (closed-end funds) and Unit Investment Trusts (UITs).

Multi-Family Office

A privately owned firm that manages investments and trusts for multiple wealthy families.

Single-Family Office

A privately owned firm that manages investments and trusts for a single wealthy family.

Wealth Managers

Wealth managers are firms that provide advisory services, investment management and financial planning services to private investors, generally high-net-worth, ultra-high-net-worth and family office investors. Some entities also provide family office services to clients.

2. hedge funds

Structures

Listed Fund

A fund that is listed on a smaller market exchange – such as the Irish Stock Exchange – usually in order to provide a degree of regulatory oversight demanded by investors. This type of fund is identified with an ISIN number.

Managed Account

A vehicle sub-advised by a hedge fund manager whose role is limited to the right to make investment decisions on behalf of an investor. Investors own actual assets as opposed to limited partnership interests in a pool of assets. They also have full transparency of the assets being managed and may tailor the portfolio according to their specific needs. They may also nominate their own service providers as a way of lowering counter-party risk. Due to the operational and logistical difficulties of this arrangement for the manager, a sizeable capital commitment is required from investors in order to open a managed account.

Master Feeder

Structure that is commonly used to accumulate funds raised from each of US taxable, US tax-exempt and non-US investors into one central master fund. This is in order to enhance the critical mass of tradable assets, improve the economies of scale under which the fund operates and enhance operational efficiencies, thereby reducing costs such as tax. The structure generally involves the use of a master fund company (incorporated in a tax-neutral offshore jurisdiction e.g. Cayman Islands or Bermuda) into which separate distinct feeder funds invest.

Société d’Investissement à Capital Variable (SICAV)

A SICAV is a fund structure that is common throughout Western Europe, especially in Luxembourg, Switzerland, Italy, Spain, Belgium and France. SICAVs are typically open-ended, but may also be closed-end.

Undertakings for Collective Investment in Transferable Securities (UCITS)

The European regulatory framework for an investment vehicle which allows it to be marketed to investors across the EU. It aims to promote high levels of investor protection through greater transparency of investment activity. UCITS funds have to offer their investors at least fortnightly liquidity and monthly transparency documentation outlining the strategy and investments of the fund. UCITS funds have restrictions on the underlying investments that they are allowed to make as well as a cap on the level of leverage they are allowed to employ.

Performance

Asset Flows

The net of all cash inflows and outflows at either industry, strategy, region of fund level.

Average Month

The average (mean) of a fund’s individual monthly returns. The average positive month provides an average of all months in which a return of zero or greater has been recorded. The average negative month is an average of all months in which a loss has been recorded.

Emerging Manager

A fund manager with a track record of less than two years.

Market Benchmarks

Benchmark returns comprise unweighted averages of constituent fund returns and provide an indication of industry and sub-sector performance in individual months and over longer periods. Funds are grouped based on their type, key strategy, sub-strategies, geographic scope and currency denomination.

Monthly Returns (Net, %)

The percentage change in the fund’s month-end net asset value from the previous month-end net asset value, after fees have been deducted. Net-of-fees returns are used to provide an indication of fund performance from the perspective of investors.

NAV per Unit

The net asset value per share of a fund. Represents the market value of a fund’s total net assets (total assets minus liabilities) divided by the number of shares outstanding. In many, but not all, cases this is the unit price or share price for new and existing investors in a fund.

Performance Date/As At Date

The date to which the performance statistic is measured. This reflects the last, or most recent, monthly return used in the calculation.

Sharpe Ratio

Provides an indication of a fund’s returns relative to its level of risk. Calculated by subtracting a predetermined risk-free rate from the annualized period return to generate the fund’s excess return, then divided by the fund’s volatility over the same period. In general, the higher the Sharpe ratio, the better the risk/reward characteristics of a fund and volatile returns are not necessarily bad, provided they are accompanied by a proportionally higher return. The exception to this is a negative Sharpe ratio as a negative excess return will mean higher amount of risk will have a positive influence on the ratio. It should be enough to know that a Sharpe ratio is negative, without knowing its magnitude, as this indicates the fund has not generated additional returns by taking on extra risk.

Volatility

Measured by the annualized standard deviation of monthly returns during the specified period. An annualized figure is approximated by multiplying the standard deviation of monthly returns by the square root of 12 (for the number of periods in a year).

Year To Date

The cumulative return of a fund during the calendar year.

benchmark indices

London Interbank Offered Rate (LIBOR)

The most commonly used benchmark for short-term interest rates. The LIBOR is fixed on a daily basis by the British Bankers’ Association.

MSCI

An index created by Morgan Stanley Capital International (MSCI) that is designed to measure equity market performances.

Russell 3000

Market capitalization-weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of the entire US market. This index encompasses the 3,000 largest US-traded stocks.

S&P 500

An index from Standard & Poor, is a market-capitalization-weighted index of the 500 largest US publicly traded companies by market value.

Treasury Bill (T-Bill)

A short-term debt obligation backed by the US Government with a maturity of less than one year.

Wilshire 5000

A market capitalization-weighted index composed of over 5,000 publicly traded companies that meet the following criteria: the companies are headquartered in the US; the stocks are actively traded on an American stock exchange; the stocks have pricing information that is widely available to the public.

Strategies

Commodoties

Focused on investments in raw materials and/or primary agricultural products such as grains, meats and orange juice that can be bought and sold on a Commodities Exchange.

Diversified

For a fund of hedge funds, diversified implies its underlying funds invest across multiple hedge fund strategies. This is as opposed to a fund of hedge funds investing in multi-strategy-specific funds, i.e. funds that focus on managing a multistrategy-themed vehicle.

Fixed Income

Approach where a manager invests primarily in bonds (also annuities or preferred stock) which come with a fixed rate of interest (coupon) payable to the bondholder at maturity. Such funds are often highly leveraged.

Fixed Income Arbitrage

Strategy that consists of the discovery and exploitation of inefficiencies in the pricing of bonds.

Foreign Exchange

Funds that trade currencies on the foreign exchange market.

Long/Short Equity

Buying undervalued stocks and selling short overvalued stocks (usually in the same sector). Long/short funds typically benefit from variable exposure (they can be net long, market neutral or even net short) and the use of leverage.

Macro

Aims to profit from changes in global economies, typically brought about by shifts in government policy that impact interest rates, in turn affecting currency, stock and bond markets. Participates in all major markets – equities, bonds, currencies and commodities – though not always at the same time.

Managed Futures/Commodity Trading Advisors (CTA)

CTAs look after managed futures accounts, deciding on their positions based on expected profit potential. This will incorporate buying and selling commodity futures or futures options. Managed futures offer the potential for reduced portfolio volatility and the ability to earn profit in any economic environment.

Multi-Strategy

A single fund whose investment strategy combines several different hedge fund strategies.

Niche

A single fund whose investment strategy combines several different hedge fund strategies.

Real Estate

A fund investing in the real estate market – can include investment in various property types.

Investment Methodologies

Commodoties

Raw materials and/or primary agricultural products such as grains, meats and orange juice that can be bought and sold on a Commodities Exchange.

Currency

Hedge funds that invest in currencies can implement a number of different strategies such as currency trading, currency options and derivatives.

Debt

The amount of money borrowed by one party from another and on which a fixed rate of interest (coupon) is paid at a later date (maturity). Bonds, loans and money-market instruments are examples of debt.

Derivatives

A security whose price is dependent on, or derived from, one or more underlying assets. The derivative itself is merely a contract between two or more parties. Value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indices. Most derivatives are characterized by high leverage.

Discretionary

A human system used to trade instruments that is characterized by proprietary approaches employing technical and/or fundamental analysis in a specific combination.

Equities

Stocks or other types of security that represent an ownership interest.

ETFs

A basket of securities that trades an index but can also be traded like a stock on an exchange.

Forward Contracts

Contract stipulating an agreement between two parties for the agreed delivery and time for a security to be exchanged. The quantity and price of the asset to be delivered in the future is specified.

Futures Contracts

Contract between two parties used to take advantage of market price movements. The buyer of the futures contract agrees on a fixed purchase price to buy the underlying commodity from the seller at the expiration of the contract. The seller of the futures contract agrees to sell the underlying commodity to the buyer at expiration and at the fixed sales price. As time passes, the contract’s price changes relative to the fixed price at which the trade was initiated. This creates profits or losses for the trader.

Options

Gives an investor the right but not the obligation to buy an asset at a specific price and at a specific date or time.

Swaps

The exchange of one security for another between firms/traders for various reasons such as a change in investment objectives and the quality or maturity of the assets.

Swaptions

An option entitling the owner to the right, but not the obligation, to enter into a swap agreement.

Systematic

A computerized system using proprietary computer models to generate buy-and-sell decisions. The models utilize quantitative analysis of different technical factors.

warrants

A security that entitles the holder to purchase the stock of the issuing company at a fixed exercise price until the expiry date.

3. fund term & conditions

High-Water Mark

Mechanism that addresses the problem of managers being rewarded for poor performance. The high-water mark ensures that performance fees are based on the net new profits for each investor on an annual basis and that a manager does not collect a performance fee until previous losses have been recouped, at which time the high-water mark resets.

Hurdle Rate

Mechanism that ensures that performance fees are only levied after a performance target or rate has been met. Typical hurdle rates are either a fixed or variable rate, linked to specific benchmarks.

Leverage

Borrowed money that amplifies the risk/return profile of an investment and in turn amplifies any subsequent gains and losses.

Management Fee

Annual fee charged by the manager to investors to cover the costs and expenses of a hedge fund. This has typically been charged at 2% of the net asset value of a fund over a 12-month period; however, the amount varies.

Performance Fee

Fee charged to the investor to reward positive returns of the fund. The manager usually takes 20% of the fund’s profits. Also known as an ‘incentive fee.’

Redemption Fees

The fee charged by the fund to investors redeeming their capital earlier than their designated redemption date.

Redemption Frequency

Determines the amount of notice required from investors wishing to redeem their capital from the fund.

Redemption Notice Period

Determines the amount of notice required from investors wishing to redeem their capital from the fund.

Seed Capital

The initial capital used to start a hedge fund.

Subscription Frequency

Determines how often a new investor can invest in a hedge fund.