Get a crash course in hedge funds with a selection of terms from the DropShot Capital glossary.
A – Absolute return
With an absolute return strategy, the source of return is not connected to traditional investments. The aim is to offer positive returns, whether share or bond markets rise or fall.
B – Beta
Beta is a measure of how closely the performance of the fund has mirrored its chosen benchmark. If the Beta is one then it is exactly the same, beta of 1.5 implies that a fund has risen/fallen by 50% more than the market. Passively managed funds aim for a beta of one.
C – Capitalization
Total market value of a company, calculated by multiplying the number of shares by the price per share. Companies are usually classified as either large cap, medium cap or small cap.
D – Dividends
The distribution of part of a company’s earnings to shareholders.
E – Equities
Also referred to as shares. An instrument that signifies an ownership position, or equity, in a corporation.
F – Fixed income securities
Also referred to as Bonds. Bonds: A bond can be issued by either a company or a government and is a way of raising capital. Investors buying a bond are effectively loaning money to the issuer.
G – Grains, metals, livestock – commodities
A commodities fund invests in a range of commodities including industrial metals, precious metals, energy, livestock and grains.
H – Hedge
In simple language, a hedge is used to reduce any substantial losses/gains suffered by an individual or an organization. A hedge fund is an investment vehicle that uses a number of different ‘hedging’ and ‘leveraging’ techniques to manage and grow the value of the fund.
I – Income
The dividend payment from equities or interest paid on bonds.
J – ‘Junk’ bonds
A sub-investment grade bond describes bonds that fail to meet a certain satisfactory credit quality as deemed by credit rating agencies such as Standard & Poor’s and Moody’s Investors Service. Bonds rated BB down to D are known as ‘sub-investment grade’ or ‘junk’ bonds.
K – RanK
This is where the fund ranks in comparison with its peers. For example, a ranking of 16/144 means that the fund is in 16th position out of a total of 144 funds within its sector.
L – Liquidity
The ease with which an investment product/fund can be sold/redeemed from, without impacting its price. Hedge funds typically offer quarterly or annual liquidity, meaning that they allow investors to redeem their shares that often.
M – Money market instruments
These are investments such as bank deposits, certificates of deposit, commercial paper, treasury bills, and floating rate notes. Money markets are global markets dealing in lending and borrowing on a short-term basis.
N – Net asset value (NAV)
The market value of a fund’s total assets, minus its liabilities and intangible assets, divided by the number of its shares outstanding. The measure is used to determine prices available to investors for redemptions and subscriptions.
O – Manager of Managers
A Manager of Managers fund is run by an overall Fund Manager, who sets the fund’s investment mandate and objectives. The Manager then selects several Fund Managers to invest the fund’s capital, who he believes have the relevant levels of expertise to achieve the fund’s aims.
P – Performance fee
A fee paid to a fund manager for providing returns on an investment, often by reference to a benchmark or Hurdle rate. This fee is based on net new profits and is earned by the hedge fund manager for the period concerned.
Q – Quartile
Twenty five percent of a ranked list. A fund whose performance is 1st quartile in its sector is among the top 25% performers of all similar funds. A fund whose performance is 4th quartile is among the lowest 25% of performers within their sector.
R – Risk
The chance that an investment’s actual return will be different than expected. All investments contain some element of risk.
S – Shares
Also referred to as equities. Instruments that signify an ownership position, or equity, in a corporation.
T – Top-down
An investment approach. A top-down investment manager will construct a portfolio by focusing on the country’s economy before deciding which sector/stocks to invest in. Economic conditions determine which industries or sectors will produce a good return, and then attractive stocks are sought within those industries/sectors.
U – Underperforming your benchmark
A negative alpha is a measure of how much a fund has underperformed its benchmark. Beta is a measure of how closely the performance of the fund has mirrored its chosen benchmark.
V – Value-at-risk
A measure of the potential change in value that a fund’s portfolio may experience. It is usually expressed as a percentage, which is referred to as a confidence level.
W – Well-established companies = a blue chip company
Blue chip: A security from a large, well-established reputable company.
X – Exchange traded funds (ETF)
Exchange traded funds (ETFs) are open-ended, this means that you can buy or sell in and out of them at any time that the market is open, and they can track almost any stock market index all over the world. Their price directly reflects the underlying value of the investments they hold.
Y – Yield
The amount of income generated by a fund’s investment in relation to the price.
Z – Zero
Downside risk calculates an average return for only the periods where return was lower than zero (or another benchmark rate) and then measures the variation of only these “losing” periods around the calculated average.