AIMA

The Alternative Investment Management Association

Alternative Investment Management Association

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Glossary

AIMA's Glossary has been developed for all those with an interest in the alternative investment industry - from the beginner to the advanced practitioner.

You will find a considerable overlap of content with the traditional fund management industry - the instruments used, the service providers employed, etc.  However, the hedge fund industry is individual in the way in which it uses these resources.

For reasons of law and accuracy, this is not a wiki.  It is a work-in-progress, however, and we invite you to submit new items for inclusion below (including the proposed definition).

  • We express our sincere thanks to Stanley Marchon, Vincent Kuhn, Nicolas Watin-Augouard, Stephen Foster and Sunil Gopalan for the creation of this resource. 
  • Special thanks are also extended to Anne Taulbut and Jennifer Nye of Katten Muchin Rosenman Cornish for the extensive legal review.
   
implied volatility
The volatility of a futures contract, security, or other instrument as implied by the prices of an option on that instrument, calculated using an options pricing model.
in-the-money
A term used to describe an option contract that has a positive value if exercised. A call with a strike price of $390 on gold trading at $400 is in-the-money 10 dollars.
incentive fee

See Performance fee.

inception date

The day on which a fund starts trading.

index arbitrage

The simultaneous purchase (sale) of stock index futures and the sale (purchase) of some or all of the component stocks that make up the particular stock index to profit from sufficiently large intermarket spreads between the futures contract and the index itself. Also see Arbitrage and Program Trading.

initial margin

Funds put up as security for a guarantee of contract fulfillment at the time a futures market position is established. See Original margin.

instrument

(1) A legal document in which a contractual relationship is given formal expression to, or by which some right is granted e.g. share, bond, loan note, contract or agreement. (2) A tradable asset such as a commodity, security, or derivative, or an index or value that underlies a derivative or could underlie a derivative.

interest rate cap

The buyer of an interest rate cap is protected by the seller of the cap from all interest rate payments that it would otherwise have to make if the interest rate were to rise above the level specified in the contract, thus creating a "cap" on its interest payment obligation (an upward hedge for the buyer). The seller of a cap is obliged to make all interest payments owing in excess of the cap rate. See also Interest rate floor.

interest rate floor

The buyer of an interest rate floor receives payments from the seller if the interest rate falls below the level specified in the contract, thereby creating a "floor" below which interest rate receipts cannot fall (a downward hedge for the buyer). See also Interest rate cap.

interest rate of return

Represents the discount rate needed to make the net present value of all cash flows equal zero. It is often viewed as the rate of return a company needs if they expanded or invested in themselves, as opposed to investing that money abroad.

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