AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

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.
 
haircut

The amount by which a lender discounts the actual market value of collateral pledged by a borrower.

hedge fund administrator

See Administrator

hedge fund manager

Manager of one or more Hedge funds. See Hedge fund.

hedge fund

There is no standard international/legal definition though they may have all or some of the following characteristics: May use some form of short asset exposure (see Short selling); may use derivatives and/or more diverse risks or complex underlying products are involved; may use some form of leverage, measured by gross exposure of underlying assets exceeding the amount of capital in the fund; Funds charge a fee based on the performance of the fund relative to an absolute return benchmark as well as a managment fee; investors are typically permitted to redeem their interest only periodically, e.g. quarterly or semi-annually; often, the manager is a significant investors alongside other fund investors.

hedging

The process of protecting the value of an investment from the risk of loss in case of an adverse price movement.

high water mark

The existence of the high water mark ensures that a fund only takes performance-related fees on new profits. For example, assume a $1,000,000 investment is made and that the fund declines by 20% in year 1, leaving $800,000 in the fund. In year 2, the fund returns 25%, bringing the investment value back to $1,000,000. If the fund employs a high water mark, it will not take incentive fees on the return in year 2, since the investment has never really grown, i.e. the fund did not make any new profits. The fund will only take incentive fees if the investment grows above the level of $1,000,000.

high yield

High Yield strategies invest in sub-investment grade debt securities chiefly with the aims of making a positive carry and achieving capital appreciation. Such funds may take long and short positions, but in practice the norm is a significant long bias. The strategy will often depend on the performance of broader high yield and, to some extent, equity markets. Opportunities may be relative as well as absolute. For example, one type of debt instrument may be mis-priced relative to other debt of the same company. This could create an opportunity to take offsetting long and short positions.

historical volatility

A statistical measure of the volatility of a futures contract, security, or other instrument over a specified number of past trading days.

holder

See Buyer.

hurdle rate

The minimum return necessary for a fund manager to start collecting incentive/performance fees. The hurdle rate may be a fixed percentage or tied to a benchmark rate such as Libor or the one-year Treasury bill rate plus a spread. If, for example, the manager sets a hurdle rate equal to 5%, and the fund returns 15%, incentive/ performance fees would only apply to the 10% above the hurdle rate.

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