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.
 
operational risk

Measures the probability that investment losses will result from factors other than credit risk, market risk or liquidity risk, such as employee fraud or misconduct, errors in cashflow models, incorrect or incomplete documentation of trades or man-made disasters.

opportunistic value

An approach that seeks to produce the greatest possible returns by assuming long-term positions in the most-efficient products at a given time. Such funds, which often pursue long/short investment strategies, may hold a variety of investments, including stocks, bonds, options and warrants, as well as distressed securities. Their strategies are based on the momentum of the investment's values.

option

An option is the right (but not the obligation) to trade a particular amount of a specific good on or before a set day at an agreed (“strike” or “exercise”) price. See Call/Call option.  The right to buy is known as a “call” option and the right to sell a “put” option. Since options give one party the opportunity to benefit when it is advantageous to them, but gives them no obligation to trade when it is not, they must pay for it. One party buys the option and pays the option “premium” to the option “writer” who must honour the contract.

option buyer

The person who buys calls, puts, or any combination of calls and puts.

option grantor

See Option writer.

option pricing model

A mathematical model used to calculate the theoretical value of an option. Inputs to option pricing models typically include the price of the underlying instrument, the option strike price, the time remaining till the expiration date, the volatility of the underlying instrument, and the risk-free interest rate (e.g., the Treasury bill interest rate). Examples of option pricing models include Black-Scholes and Cox-Ross-Rubinstein.

option writer

The person who originates an option contract by promising to perform a certain obligation in return for the price or premium of the option. Also known as Option grantor.

options arbitrage

An approach that seeks to exploit pricing differentials between similar option contracts or between the price of the option contract and its associated securities.

original margin

Term applied to the initial deposit of margin money each clearing member firm is required to make according to clearing organization rules based upon positions carried, determined separately for customer and proprietary positions; similar in concept to the initial margin or security deposit required of customers by exchange rules. See Initial Margin.

OTC
The trading of commodities, contracts, or other instruments not listed on any exchange. OTC transactions can occur electronically or over the telephone. Also referred to as Off-Exchange.
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