AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

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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.
 
style

A generic investment approach - such as equity hedge and long/short, event driven, arbitrage, global macro, or fund of funds - that has developed as a result of numerous managers aiming to exploit a particular type of market inefficiency, sharing a broadly similar conceptual understanding of that inefficiency, and employing a broadly similar investment methodology in order to extract value. Practitioners of a particular style will have their own investment process or strategy with unique distinguishing features and techniques.

subordinated debt

This is a loan secured by collateral on which the lender has a second position behind the senior debt lender. Because of the higher risk to the subordinated debt lender, some type of additional compensation is usually necessary, typically in the form of warrants or options on the company's stock. Often, repayment can be arranged as interest only for some portion of the term of the debt.

support

In technical analysis, a price area where new buying is likely to come in and stem any decline.

survivorship bias

An over-estimation of historic returns for the hedge fund industry that results from the tendency of poor-performing hedge funds to drop out of an index while strong performers continue to be tracked. The result is a sample of current funds that includes those that have been successful in the past, while many funds that underperformed are not included.

swap

In general, the exchange of one asset or liability for a similar asset or liability for the purpose of lengthening or shortening maturities, or raising or lowering coupon rates, to maximise revenue or minimise financing costs. This may entail selling one securities issue and buying another in foreign currency; it may entail buying a currency on the spot market and simultaneously selling it forward. Swaps also may involve exchanging income flows; for example, exchanging the fixed rate coupon stream of a bond for a variable rate payment stream, or vice versa, while not swapping the principal component of the bond. Swaps are generally traded over-the-counter.

swaption

An option to enter into an interest rate swap.

synthetic asset

See Replicating portfolio.

systematic risk

Systematic risk is the level of risk that is faced by a well-diversified portfolio. It is sometimes known as “market risk” as it is the risk of the market as a whole - that is, risk factors that impact on all stocks in the economy - for example changes in interest rates or the state of the economy. It is said to be undiversifiable risk because adding more investments to a diversified portfolio will not decrease the level of this type of risk. Beta (b) is a measure of systematic risk taken on by a portfolio.

systematic trading

Systematic Trading strategies use rule-based trading models implemented in a systematic fashion to identify and execute trading opportunities with limited manager intervention.

systemic risk

The risk that a default by one market participant will have repercussions on other participants due to the interlocking nature of financial markets. For example, Customer A's default in X market may affect Intermediary B's ability to fulfil its obligations in Markets X, Y, and Z.

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