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Here below is a glossary of terms.
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Absolute return
Positive returns that an asset achieves over a period of time. This measure simply looks at the appreciation or depreciation of an asset and is not compared with other returns in the markets.
AIM (Alternative Investment Market)
The London Stock Exchange's market for small, young growing companies likely to be higher risk and less liquid than those on the London Stock Exchange's Official List. It gives investors the opportunity to invest and trade in the shares of these companies on a market regulated by the London Stock Exchange.
Alpha
A measure of a fund's risk-adjusted return. A higher alpha implies that a fund has performed better than would have been expected given its volatility.
Alternative asset
A term referring to any non-traditional asset with potential economic value that would not be found in a standard investment portfolio. Hedge funds, private equity funds, property funds and infrastructure funds are alternative asset funds.
Beta
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
Closed-end fund
An investment company, such as an investment trust, with a fixed capital structure. Variations in demand for the shares of the fund are reflected in movements in its share price and not by an expansion or contraction in the supply.
Correlation
A statistical measure of how two securities move in relation to each other.
Derivatives
Instruments providing exposure to all or part of a security, currency, commodity, index or other return, the price of which will move in a direct relationship to the price of the reference instrument.
Feeder fund
A fund that conducts virtually all of its investing through another fund, called the master fund.
Futures/options
Financial contracts obligating the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardised to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset while others are settled in cash. The futures markets are characterised by the ability to use high leverage relative to stock markets.
Gearing or leverage
Terms used to describe the use of borrowings.
Hedge fund strategies
1. Convertible arbitrage
This involves the simultaneous purchase of a portfolio of convertible bonds, while selling short the corresponding equity shares. Managers may hedge or trade a portion of the interest rate and credit risk through instruments such as interest rate swaps, treasuries, credit default swaps and asset swaps. This strategy also includes relative value options trading.
2. Credit
This involves buying and selling short various credit qualities of corporate debt, including distressed, high yield and investment grade, as well as credit related products such as credit default swaps, asset swaps and credit indices. Trades may be both relative value and directional.
3. Equity long/short
This involves taking long positions in equities that are viewed as under-valued and short positions in equities that are viewed as over-valued. The investment approach is generally discretionary and the portfolio may be net long or net short.
4. Equity market neutral
This involves taking long and short positions in various equities in an attempt to benefit from relative price inefficiencies. The investment approach may be either discretionary or systematic, and the investment will generally have very low net dollar and/or beta exposure.
5. Fixed income arbitrage
This involves the exploitation of price inefficiencies in a variety of fixed income securities. Trading strategies may include, but are not limited to, yield curve arbitrage and directional trades, sovereign and corporate credit trading, mortgage arbitrage and cash vs. futures.
6. Macro
This involves discretionary trading in the global currency, interest rate, equity and commodity markets to take advantage of directional movements using primarily a fundamental approach. Managers may utilize a wide variety of instruments to effect their positions.
7. Managed futures
This involves systematic trading in the global currency, interest rate, equity and commodity markets to take advantage of directional movements using primarily a technical approach. System inputs are technical and/or fundamental and trends are generally identified using a variety of forecasting models. Trades are most often executed in the futures markets.
8. Mergers & special situations
This involves investing in opportunities created by corporate events such as acquisitions, spin-offs, bankruptcies, reorganisations, recapitalisations and share buy-backs. Managers may invest through a variety of securities or derivatives including ordinary shares, preference stock, investment grade debt, distressed debt, convertible bonds, options and swaps. Trades may be both relative value and directional.
9. Multi-strategy
This involves any combination of relative value, tactical and event-driven strategies. Most multi-strategy funds will focus on the more common hedge fund strategies, including convertible arbitrage, mergers/special situations and credit.
Idiosyncratic risk
Another term for unsystematic risk. The variability in the returns of an investment as a result of factors specific to that investment only.
Index
This provides indicative returns for an asset or a basket of assets whose composite value is determined according to prescribed rules.
Levered
A share class that uses gearing (or leverage) to achieve a geared exposure.
LIBOR
London Interbank Offered Rate (LIBOR) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market known as the interbank market.
Liquidity
The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity can be characterised by a high level of trading activity.
Listing
To be included and traded on a given exchange. Most exchanges have specific requirements that companies must meet to be listed and continue to stay listed.
Master fund
In general, an investment vehicle that enables individual investors to invest money into one or more underlying investments that are operated by professional managers.
Net asset value (NAV)
The valuation of a collective investment based on the market price of securities held in its portfolio. Net asset value per share is calculated by dividing this figure by the number of ordinary shares in issue.
Prior ranking
Shares with a prior ranking have a higher claim on assets and/or dividends than other shares.
Protected cell company
A protected cell company, or PCC, can be thought of as being a standard limited company that has been separated into legally distinct portions or cells. The revenue streams, assets and liabilities of each cell are kept separate from all other cells. Each cell has its own separate portion of the PCC's overall share capital, allowing shareholders to maintain sole ownership of an entire cell while owning only a small proportion of the PCC as a whole.
Risk overlay
To hedge the portfolio with an investment in securities such as futures or options to reduce the risk of the overall portfolio. The overlay does not affect the activities of the individual strategy managers.
Realised gains
A gain resulting from selling an asset at a price higher than the original purchase price.
Recognised investment exchange
Recognition as an investment exchange or clearing house under the Financial Services and Markets Act 2000 enables the body concerned to carry out investment business in the UK. The statutory body with overall responsibility for recognition is the Financial Services Authority (FSA).
Secondary market
A market where previously issued securities are traded as distinct from the primary market, where securities are originally issued i.e. sold for the first time.
Swap
The exchange of one set of returns for another. Hedge ETS has entered into a swap with RBC to access the RBC Hedge 250 Index.
UK Listing Authority
The Financial Services Authority, acting as the competent authority for listing, is referred to as the UK Listing Authority (UKLA), and maintains the Official List.
Universe
A term used to describe the collective investments industry or a sector within that industry as a whole.
Unlevered
A share class that does not use gearing.
Value at Risk (VAR)
A technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatilities.
Volatility/standard deviation
The speed and magnitude of price changes measured over a certain period of time. A price that frequently moves sharply will be considered to have a high degree of volatility.
Zero dividend preference share
A class of share within a split capital fund. It has no right to receive a dividend but is entitled to a fixed sum on repayment. This figure is usually expressed as an annual percentage and accrues annually.