http://www.aima.org/ http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_absolute return The term indicates actual gain or loss without regard to market benchmarks or peer groups Whereas traditional investments typically measure their success in terms of whether they track or outperform a key market benchmark or index relative returns hedge funds and alternative investmentabsolute return strategies aim to achieve outright positive returns irrespective of whether asset prices or key market indices rise or fall ie absolute returns rather than relative returns http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_absolute return fund An absolute return hedge fund has a primary objective to produce positive returns rather than outperforming a particular benchmark http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_accredited investor An institution or highnet worth individual to whom securities may be promoted pursuant to a private placement in reliance on the safe harbour provided by Regulation D of the US Securities Act of 1933 and defined as one of the following: 1 a bank insurance company registered investment company business development company or small business investment company; 2 an employee benefit plan a charitable organization corporation or partnership or a trust not formed to acquire the securities offered wit http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_accumulation index An index in which figures are adjusted to account for the price movements and dividends paid by those companies included in the index http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_active risk Also known as Tracking Error Refers to the variation between a fund's returns and a benchmark's returns A large tracking error indicates a large variation from the benchmark and implies a high level of manager risk http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_actual assets under management See assets under management http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_actuals 1 The physical or cash commodity underlying a futures contract 2 A term used to describe the historical volatility of a security http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_administrator An entity usually independent of the Investment Manager who provides a range of services to the Fund under the terms of an agreement with it often in the form of a Service Level Agreement including shareholder services registrar and antimoney laundering services reconciliation services and recordkeeping functions Some Administrators offer ''integrated'' solutions which allow Investment Managers to outsource some of their own backoffice functions http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_agency bond A US debt security issued by a US governmentsponsored enterprise such as Fannie Mae or Freddie Mac designed to resemble a US treasury bond http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_agency note A US debt security issued by a US governmentsponsored enterprise such as Fannie Mae or Freddie Mac designed to resemble a US treasury note http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_aggregation The principle under which all futures positions owned or controlled by one trader or group of traders acting in concert are combined to determine reporting status and compliance with speculative position limits http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_aggressive growth An approach that aims to produce the highestpossible returns by investing in relatively risky assets employing high leverage or making speculative investments that aren't fully hedged http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_alpha Anumerical value indicating a managerrsquo;s riskadjusted excess rate of return relative to a benchmark Measures a managerrsquo;s ldquo;valueaddedrdquo; in selecting individual securities independent of the effect of overall market movements http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_alternative assets A category of nontraditional instruments that includes arbitrage vehicles commodities distressed securities oilandgas partnerships private equity real estate timber venture capital or other assets whose returns aren't correlated to the stock and bond markets http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_alternative investment The terms lsquo;alternative investmentrsquo; 'hedge fundrsquo; and lsquo;absolute returnrsquo; often get used interchangeably In the field of asset management the essential defining features of alternative investments are: 1 the pursuit of absolute return ndash; that is the quest to achieve a positive return regardless of whether asset prices are rising or falling; 2 freedom to trade all asset classes and a wide range of financial instruments while employing a variety of investment styles s http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_American option An option that may be exercised at any time before the expiry date See European option http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_annual rate of return The percentage change in the fundrsquo;s share price over a specified period of time ie monthly annually It is calculated as final share price initial share price initial share price Sometimes referred to a simply the quot;returnquot; See also annualised returncompound rate of return http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_annualised return The percentage change in the fundrsquo;s share price over a specified period of time ie monthly annually It is calculated as final share price initial share price initial share price Sometimes referred to a simply the quot;returnquot; http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_annualised return/compound rate of return The compounded rate of change in the value of an investment that has been achieved each year to enable the initial price to grow or decline to the latest selected price over a particular period http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_arbitrage This strategy exploits the mispricing between two related assets by investing long in assets perceived to be undervalued and shorting assets to be overvalued A profit is achieved when and if the prices of the two assets converge Earning returns that far exceed the risk incurred http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_arbitration The legal process for settling disputes between parties wherein the parties refer the dispute to a person or panel the Arbitrators by whose decision they agree to be bound that is less structured than court proceedings In the US the term is sometimes also used to refer to mediation or non binding arbitration a process which does not bind the parties http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_articles of association The legal document filed with a state to create a corporation Also known as the certificate of incorporation or corporate charter It establishes a corporation's purpose and structure It conveys the corporation's purpose name primary place of business names of directors and the amounts and types of stock it is authorized to issue Also called a Memorandum and Articles of Incorporation in certain jurisdictions http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_articles of incorporation The legal document filed with a state to create a corporation Also known as the certificate of incorporation or corporate charter It establishes a corporation's purpose and structure It conveys the corporation's purpose name primary place of business names of directors and the amounts and types of stock it is authorized to issue Also called a Memorandum and Articles of Association in certain jurisdictions http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_asset allocation The structure of a portfolio namely the allocation of specific portions of it across different assets classes ie securities property cash fixed interest etc http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_assets under management Includes all investments leveraged and unleveraged including cash that are managed and administered by a fund manager for itself and its customers ACTUAL unleveraged assets NOTIONAL levered assets http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_Associated Person 1 A person in the securities business who is affiliated with a NASDAQ member firm whether or not the person is registered or exempt from registration with NASD 2 A person registered with the CFTC or NFA who solicits orders customers or customer funds on behalf of a Futures Commission Merchant an Introducing Broker a Commodity Trading Advisor a Commodity Pool Operator or an Agricultural Trade Option Merchant http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_at-the-market An order to buy or sell a security or futures contract at whatever price is obtainable when the order reaches the trading facility See market order http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_at-the-money When an option's strike price is the same as the current trading price of the underlying commodity the option is atthemoney http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_auditor The Auditor issues a written opinion upon the fair presentation of the Fund's annual financial statements in accordance with the Fund's applicable accounting and auditing standards on the basis of a yearend audit of the Fund's books and records http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_AUM See assets under management http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/A/#glossary_average rate of return The mean average of a fund's returns over a given number of periods It is calculated by dividing the sum of the rates of return over those periods by the number of periods http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_back months In futures and options trading the months with the expiration dates furthest away in time Futures delivery months other than the spot or front month also called deferred months http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_back office A department of an investment firm fund manager brokerdealer bank not directly involved in sales or trading but which processes all activities related to the settlement of financial transactions the compilation and verification of reports and settlement of trades as well as performing record keeping and regulatory compliance functions http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_back-test Attempts to determine the effectiveness of a technical andor systematic trading model by applying the system to past periods and comparing those results with the actual performance of other strategies It is not a measure of projecting future performance See comparative back test http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_backwardation A Market situation in which futures prices are progressively lower in the distant delivery months than in the nearest delivery month For instance if the gold quotation for January is 36000 per ounce and that for June is 35500 per ounce the backwardation for five months against January is 500 per ounce Backwardation is the opposite of contango http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_bankruptcy/distressed Long undervalued securities of companies that are usually in financial distress http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_basis point A measurement of price fluctuation in an instrument equal to 1100 of one per cent http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_basis swap With a basis swap each party pays a floating rate of interest and each is tied to different floating rates The basis swap sets a spread between two indices for the life of the transaction Basis swaps are used by banks to hedge the mismatch between the index of their assets and the index of their liabilities and by swap dealers to create structures for companies to hedge indices other than Libor http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_bear An investor who believes securities prices will fall: the opposite to a bull http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_bear market A market in which share prices are falling and the volume and value of securities being traded is low http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_bear market rally A temporary rise in prices during a bear market See Correction Also a temporary decrease during a bull market A market correction is a sometimes defined as a drop of at least 10 but not more than 20 25 on intraday trading http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_benchmark Any basis of measurement security or index used as a reference point against which a comparison and evaluation of performance of an investment portfolio can be made http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_beta Beta beta; of a portfolio is the portfoliorsquo;s sensitivity to market movements It represents the change in the portfoliorsquo;s return for every 1 change in the market return The sign of the beta indicates whether on average the portfoliorsquo;s returns move in line with the market or in the opposite direction If beta; 10 returns tend to mirror the market If beta; 20 returns tend to be twice those of the market If beta; 05 returns tend to be half that of the market http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_beta neutral Describes a fund with no sensitivity to broad market movements Therefore the fund's beta is close to zero http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_bid The purchase price offered for a commodity currency security or other asset http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_Black-Scholes model An algorithmformula created by Fischer Black and Myron Scholes in 1973 used to estimate the fair value of a stock option at the grant date using the following variables: the expected riskfree interest rate stock price exercise price volatility and expected option term http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_board of trade A US term used to define any organized exchange or other trading facility for the trading of commodities http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_bond A debt security issued by entities such as corporations and governments in return for cash from the lender investor The issuer of a bond is effectively a borrower and is therefore required to pay interest to the lender throughout the life of the bond at periodic intervals and to repay the principal amount of the loan at maturity http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_bond futures arbitrage An approach that aims to profit from pricing inefficiencies between bonds and corresponding bond futures http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_bottom-up investment process An approach that seeks to identify investments that will produce strong returns before assessing the influence that economic factors will have on those assets http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_broker A person paid a fee or commission for executing buy or sell orders for a customer http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_broker association Two or more persons with exchange trading privileges who 1 share responsibility for executing customer orders; 2 have access to each other's unfilled customer orders as a result of common employment or other types of relationships; or 3 share profits or losses associated with their brokerage or trading activity http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_bull An investor who expects securities prices to rise the opposite to a bear http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_bull market A market in which share prices are rising and the volume and value of securities being traded are high http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_butterfly spread A threelegged option spread in which each leg has the same expiration date but different strike prices For example a butterfly spread in soybean call options might consist of one long call at a 550 strike price two short calls at a 600 strike price and one long call at a 650 strike price http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_buy (or sell) on close To buy or sell at the end of the trading session within the closing price range http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_buy (or sell) on opening To buy or sell at the beginning of a trading session within the open price range http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_buyer A market participant who takes a long futures position or buys an option An option buyer is also called a Taker Holder or Owner http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/B/#glossary_buying hedge Hedging transaction in which futures contracts are bought to protect against possible increases in the cost of commodities Also known as Long hedge See Hedging http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_call 1 An option contract giving the buyer the right but not the obligation to purchase a commodity security futures contract or other asset or to enter into a long futures position; 2 a period at the opening and the close of some futures markets in which the price for each futures contract is established by auction; or 3 the requirement that a financial instrument be returned to the issuer prior to maturity with principal and accrued interest paid off upon return http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_call option The right but not the obligation to purchase an agreed amount of a commodity security futures contract or other asset at a predetermined price within a specified period of time See American option and European option http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_capacity The amount of investment capital that can be comfortably absorbed by a manager or strategy without a diminishing of returns A widely used indication of whether or not a manager or strategy faces capacity constraints is to analyse the degree to which they experience slippage see Slippage in the execution of their strategy or trades There are a number of factors that may limit investment such as the size of the underlying market and its liquidity The investor should establish limitations to specif http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_capital guarantee See principal protection http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_capital-structure arbitrage An approach that seeks to exploit discrepancies in the valuations of various securities that a particular company offers based on their seniority For example such funds might take a long position in a company's senior bank debt while shorting its stock http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_cash commodity The physical or actual commodity that is or may be owned as the result of a completed contract and which must be accepted upon delivery As distinguished from a futures contract sometimes called Spot Commodity or Actuals which is not completed until a specified future date The cash commodity contract specification is set by the relevant commodity exchanges http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_cash management Cash management is an investment discipline used by entities of all kinds to ensure liquidity and to maximize returns on cash balances The five key components of effective cash management are: collection disbursement concentration investment and information control For hedge funds cash management if effectively employed can play an integral part in the overall profitability of the fund http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_cash market Transactions completed in the cash or spot markets where ownership of the commodity is transferred from seller to buyer and payment is made on the delivery of the commodity The cash market contrasts with the futures market in which contracts are completed at a specified time in the future The market for the cash commodity as contrasted to a futures contract which takes the form of: 1 an organised selfregulated central market eg a commodity exchange; 2 a decentralised overthecounter market; or 3 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_CD;CDs See Certificate of Deposit http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_CDO See collateralised debt obligation http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_CDS See credit default swap http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_Certificate of Deposit;certificate of deposit Short or mediumterm interestbearing US Federal Deposit Insurance Corporation FDICinsured debt instrument offered by banks and savings and loans institution in the US CDs offer higher rates of return than most comparable investments in exchange for tying up invested money for the duration of the certificate's maturity Money removed before maturity is subject to a penalty CDs are low risk low return investments and are also known as quot;time depositsquot; because the account holder has agree http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_CFD See Contracts for Difference http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_CFO See collateralised fund obligation http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_charting The use of graphs and charts in the technical analysis of futures markets to plot trends of price movements average movements of price volume of trading and open interest http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_chartist Technical trader who reacts to signals derived from graphs of price movements http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_churning Excessive trading of a discretionary client account by a person with control of the account for the purpose of generating commissions while disregarding the interests of the customer http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_clearing The process of reconciling details of a securities trade that are provided by various parties to the transaction prior to settlement Clearing can be a highly lucrative business for securities firms partly because the function is often linked to marginlending activities Those offering clearing are brokersprime brokersfutures commission merchants http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_clearing corporation See clearing house http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_clearing firm See clearing house http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_clearing house A firm that works with an exchange to handle confirmation delivery and settlement of transactions The clearinghouse becomes the buyer to each seller and the seller to each buyer and assumes responsibility for protecting buyers and sellers from financial loss by assuring performance on each contract Also called Clearing corporation or Clearing firm http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_clearing price See Settlement price http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_CLO See collateralised loan obligation http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_close The exchangedesignated period at the end of the trading session during which all transactions are considered made quot;at the closequot; http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_closed fund A hedge fund or openend mutual fund that has temporarily or permanently stopped accepting capital from investors usually due to rapid asset growth Not to be confused with a closedend fund http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_closed-end fund A fund with a fixed number of shares outstanding that may be listed on an exchange and publicly traded at a premium or discount to the fund's Net Asset Value Not to be confused with a closed fund http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_closing out Liquidating an existing long or short futures or option position with an equal and opposite transaction Also known as Offset http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_closing price (or range) The price or price range recorded during trading that takes place in the final period of a trading session's activity that is officially designated as the quot;closequot; http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_CMO See collateralised mortgage obligation http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_collar A combination of options in which the holder of the contract has bought one outofthe money option call or put and sold one or more outofthemoney puts or calls Doing this locks in the minimum and maximum rates that the collar owner will use to transact in the underlying at expiry http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_collateral (in the context of margin lending) Shares or managed funds provided by a borrower to secure a margin loan http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_collateralised debt obligation A leveraged investment vehicle that issues notes to fund the purchase of pools of bonds loans preferred stock hedgefund shares or other CDOs Also defined as a securitisation of other bonds loans and financial instruments Principal and interest payments on the underlying assets fund the principal and interest payments owed to holders of CDO notes Based on the type of their underlying assets CDOs can take a variety of forms including collateralized bond obligations CBOs which are backed almost ent http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_collateralised fund obligation A type of collateralized debt obligation CDO that is backed by zerocoupon bonds to fund the purchase of shares in hedge funds privateequity funds or multimanager vehicles known as funds of funds From the fund manager's standpoint such issues serve as a source of longterm capital and behave much like funds of funds that purchase shares of their vehicles Fund managers can earn arbitrage profits on the returns that are left after CFO holders have been made whole CFOs are often structured as ze http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_collateralised loan obligation Collateralised loan obligation CLO similar in structure to the Collateralized Mortgage Obligation See Collateralized Mortgage Obligation for analogous terms the only difference here being that the securities issued on behalf of the originating bank are backed by receivables from loans rather than bonds http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_collateralised mortgage obligation A mortgagebacked bond that separates mortgage pools into short medium and longterm portions Each class is paid a fixed rate of interest at regular intervals http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_commercial paper Unsecured shortterm promissory notes issued by corporations with maturities ranging from 2 to 270 days http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_commission 1 A fee charged by a broker or agent for hisher services in facilitating a transaction; 2 The charge made by a commission house for buying and selling commodities; or 3 the fee charged by a futures broker for the execution of an order Note: when capitalised the Commission usually refers to the CFTC http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_commodity A commodity as defined in the Commodity Exchange Act includes the agricultural commodities enumerated in Section 1a4 of the Commodity Exchange Act and all other goods and articles except onions as provided in Public Law 85839 7 USC sect; 131 a 1958 law that banned futures trading in onions and all services rights and interests in which contracts for future delivery are presently or in the future dealt in http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_commodity pool An investment trust syndicate or similar form of enterprise operated for the purpose of trading commodity futures or option contracts http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_commodity pool operator A person engaged in a business similar to an investment trust or a syndicate and who solicits or accepts funds securities or property for the purpose of trading commodity futures contracts or commodity options The CPO either itself makes trading decisions on behalf of the pool or engages a commodity trading advisor to do so http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_commodity price index Index or average which may be weighted of selected commodity prices intended to be representative of the markets in general or a specific subset of commodities eg grains or livestock http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_commodity trading adviser Individuals or organizations that directly or indirectly advise others as to the value or advisability of buying or selling futures contracts In the US certain commodity trading advisers are required to or elect to register with the CFTC and are generally required to be members of the National Futures Association http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_comparative back-test See backtest http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_compound annual rate of return See rate of return http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_contango Market situation in which prices in succeeding delivery months are progressively higher than in the nearest delivery month; the opposite of backwardation http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_contract 1 A term of reference describing a unit of trading for a commodity future or option; 2 an agreement to buy or sell a specified commodity detailing the amount and grade of the product and the date on which the contract will mature and become deliverable http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_Contracts for Difference CFDs or Contracts For Difference are a leveraged equity derivative security that allow users to speculate on share price movements without the need for ownership of the underlying shares http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_convergence An approach that exploits discrepancies in the values of securities that have historically been almost identical and assumes that they will ultimately become fairly priced and their values will converge http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_convertible arbitrage This strategy is based on hedged investing in the convertible securities of a company typically long the convertible and short the common stock of the company issuing the convertible Positions can generate profits from the bond and the short sale while being hedged against directional market moves These funds may invest in a single market eg the US or they may invest globally http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_convertible bond A corporate bond that has a set maturity date pays interest in the form of a coupon and gives the holder the option to convert the bond into a specific number of shares of the issuing company in other words it has an 'embedded option' As it has the features of both a bond and stock its valuation reflects both types of instrument http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_correction A temporary decrease during a bull market A market correction is a sometimes defined as a drop of at least 10 but not more than 20 25 on intraday trading http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_correlation Correlation Rsquared is a measure of the interdependence or strength of the relationship between two investments It tells us something about the degree to which the variations of returns from their respective means move together If two investments are positively correlated when one performs above its mean return it is likely that the other will also perform above its own mean return If two investments are negatively correlated when one performs above its mean return it is likely that the other http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_correlation coefficient A statistical measure of the interdependence of two or more random variables Fundamentally the value indicates how much of a change in one variable is explained by a change in another Used in portfolio analysis and modeling The correlation coefficient r is a measure of how nearly a scatterplot falls on a straight line The correlation coefficient is always between 1 perfect negative correlation and 1 perfect positive correlation http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_cost of borrowing (in the context of margin lending) Primarily refers to the interest charged on borrowed funds for margin lending to be a successful investment strategy the return needs to exceed the cost of borrowing See Margin Lending http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_counter-trend trading In technical analysis the method by which a trader takes a position contrary to the current market direction in anticipation of a change in that direction http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_counterparty The opposite party in a bilateral agreement contract or transaction In the retail foreign exchange or forex context the party to which a retail customer sends its funds http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_country-specific investment strategy An approach that involves a heavy concentration of investments usually stocks in one country or a few countries within a geographical region http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_CPO See Commodity pool operator http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_credit default swap;Credit Default Swap These are arrangements where the buyer pays a premium to the bank and receive a cash payment should a default event occur for a reference asset It has the same economic effect as shorting a bond http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_credit derivatives Similar to insurance contracts credit derivatives are used to transfer the risk of a company defaulting on its debt from one party to another The use of credit derivatives makes it easier to take a short position on a company's debt a trade that has traditionally been expensive and difficult in the underlying corporate bond market http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_credit risk Credit risk is the risk that another party may fail to honour an agreement The archetypal example would be the issuer of a bond defaulting on its obligation to pay back its debt Agencies such as Standard and Poors Samp;P and Moodyrsquo;s grade debtissuers according to their creditworthiness If a party is perceived to become less creditworthy the market price of its debt is likely to fall as a buyer would need to be compensated for the increased credit sensitivity and higher risk of default Incre http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_cross rate In foreign exchange the price of one currency in terms of another currency in the market of a third country For example the exchange rate between Japanese yen and Euros would be considered a cross rate in the US market http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_cross-margining A procedure for margining related securities options and futures contracts jointly when different clearing organizations clear each side of the position http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_CTA See Commodity trading adviser http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_currency swap A swap that involves the exchange of one currency eg US dollars for another eg Japanese yen on a specified schedule http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_custodian A bank trust company or other financial institution that holds and protects a Fund's assets and provides other services including collecting money from investors distributing redemption proceeds maintaining margin accounts registering investments and exercising options Usually a Fund's Prime Brokers will perform the role of Custodian http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/C/#glossary_cyclical stocks Shares that move directly with the business cycle; that is they generally advance as business conditions improve and decline as business conditions weaken http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_day trader A trader often a person with exchange trading privileges who takes positions and then offsets them during the same trading session prior to the close of trading http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_deal arbitrage Longshort equity securities of companies involved in corporate transactions http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_dealer An individual or firm that acts as a market marker in an instrument such as a security or foreign currency http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_dealing day The specific day on which investors can subscribe for or redeem their holding in a product as detailed in the relevant product prospectus For alternative investment products the dealing day is usually weekly monthly or quarterly http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_debt See Junior debt Mezzanine debt Secured debt Senior debt Subordinated debt http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_default Failure to perform on a contract such as failure to meet a margin call or to make or take delivery http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_delta delta; The sensitivity of an option price to moves in the price of the underlying asset http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_delta neutral Refers to a position involving options that is designed to have an overall delta of zero http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_deposit The initial outlay required by a broker of a client to open a futures position returnable upon liquidation of that position http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_derivative A financial instrument traded on or off an exchange the price of which is directly dependent upon ie quot;derived fromquot; the value of one or more underlying securities indices debt instruments commodities other derivative instruments or any agreed upon pricing index or arrangement eg the movement over time of the Consumer Price Index or freight rates Derivatives involve the trading of rights or obligations based on the underlying product but do not directly transfer property They are used to http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_derivatives clearing organisation A clearing organization or similar entity that in respect to a contract 1 enables each party to the contract to substitute through novation or otherwise the credit of the derivatives clearing organization for the credit of the parties; 2 arranges or provides on a multilateral basis for the settlement or netting of obligations resulting from such contracts; or 3 otherwise provides clearing services or arrangements that mutualise or transfer among participants in the derivatives clearing organizat http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_directional trading Trading strategies designed to speculate on the direction of the underlying market especially in contrast to volatility trading http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_disclosure A document providing access to any information relevant and necessary for an investor to make an informed decision about the viability and suitability of an investment Disclosure documents are heavily regulated and must include the exact nature and extent of the risks associated with a particular investment See Prospectus http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_discount 1 The amount a price would be reduced to purchase a commodity of lesser grade; 2 sometimes used to refer to the price differences between futures of different delivery months as in the phrase quot;July at a discount to Mayquot; indicating that the price for the July futures is lower than that of May http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_discretionary account An arrangement by which the holder of an account gives written power of attorney to someone else often a Commodity Trading Advisor to buy and sell without prior approval of the holder; often referred to as a quot;managed accountquot; or controlled account http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_distressed securities Distressed securities funds attempt to benefit from the securities of undervalued companies which are subject to financial distress ie restructuring liquidation bankruptcy etc The strategy consists of buying the distressed companyrsquo;s securities from the senior secured debt to the ordinary shares at a discount price holding them through the whole restructuring process and selling them after they have appreciated again Distressed Securities strategies are generally characterized by a relativel http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_diversification Generally refers to the variety of investments in a fund's portfolio Riskaverse fund managers seek to combine investments that are unlikely to all move in the same direction at the same time http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_documents Varying fund documents required dependent on fund domicile See Articles of incorporation See Investment statement See Memorandum See Prospectus See Offer document See Offering memorandum See Prospectus See Service agreements See Trading advisor report http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_downside deviation Similar to the loss standard deviation except the downside deviation considers only returns that fall below a defined Minimum Acceptable Return MAR rather then the arithmetic mean For example if the MAR were assumed to be 10 the downside deviation would measure the variation of each period that falls below 10 The loss standard deviation on the other hand would take only losing periods calculate an average return for the losing periods and then measure the variation between each losing return and http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_downside risk Downside risk is a similar measure to Volatility except that this statistic 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 quot;losingquot; periods around the calculated average In other words this statistic measures the volatility of the downside performance http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/D/#glossary_drawdown The percentage loss that a fund incurs from its peak net asset value to its lowest value The maximum drawdown over a significant period is sometimes employed as a means of measuring the risk of a vehicle Usually expressed as a percentage decline in net asset value The period between the peak level and the trough is called the length of the drawdown and the period between the trough and the recapturing of the peak is called the recovery The worst or maximum drawdown represents the greatest peak t http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_E-mini A mini contract that is traded exclusively on an electronic trading facility EMini is a trademark of the Chicago Mercantile Exchange http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_efficiency test The Efficiency Test is a key risk management tool It is the cost of the cheapest dynamic trading strategy trading some reference index and cash which generates the same payoff distribution as the hedge fund First a payoff function is constructed that in combination with the distribution of the reference index yields the same endofmonth payoff distribution as the fund Second this payoff function is priced using standard option pricing technology The Efficiency Test can be interpreted as a highly http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_efficient frontier The combination of securities that maximizes the expected return for any level of expected risk or that minimizes expected risk for any level of expected return http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_efficient market In economic theory an efficient market is one in which market prices adjust rapidly to reflect new information The degree to which the market is efficient depends on the quality of information reflected in market prices In an efficient market profitable arbitrage opportunities do not exist and traders cannot expect to consistently outperform the market unless they have lowercost access to information that is reflected in market prices or unless they have access to information before it is reflec http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_EFS See Exchange of futures for swaps EFS http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_electronic trading facility A trading facility that operates by an electronic or telecommunications network instead of a trading floor and maintains an automated electronic audit trail of transactions See Exchange http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_eligible investor An investor who satisfies the suitability and eligibility requirements of a fund generally as set forth in the fund's Prospectus and is able to acquire sharesinterests in a fund without violating applicable laws in a particular jurisdiction generally in relation to the offering of sharesinterests by way of the relevant private placement exemptions in the country into which the sharesinterests are to be offered http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_Elliot wave 1 A theory named after Ralph Elliot who contended that the stock market tends to move in discernible and predictable patterns reflecting the basic harmony of nature and extended by other technical analysts to futures markets; 2 in technical analysis a charting method based on the belief that all prices act as waves rising and falling rhythmically http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_emerging markets Emerging Markets funds invest in equity or debt of emerging countries which tend to have higher inflation and volatile growth Some Emerging Markets funds allocate all their capital to individual regions while others diversify their investments and shift their weightings among these regions according to their market views Short selling is not permitted or possible in many emerging markets and therefore effective hedging is often not available although Brady debt can be partially hedged via US Tre http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_equity The net worth of a company This represents the ownership interest of the shareholders common and preferred of a company For this reason shares are often known as equities http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_equity hedge This directional strategy involves both long and short equityoriented investing The manager can invest using different approaches including value andor growth small medium andor large capitalization stocks The manager may chose to maintain the portfolio from net long to net short or invest with options and futures to mitigate market exposure The portfolio focus may be regional such as longshort global US or Europe or sector specific such as longshort technology stocks or healthcare stocks http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_equity long short Longshort strategies represent an evolution of traditional longonly equity investment As with longonly strategies managers aim to buy undervalued securities profiting when their prices rise However in longshort strategies they also aim to sell short overvalued securities Longshort managers differ further from buyandhold investors by having the flexibility to use leverage as well as derivatives such as futures and options By combining long and short positions longshort equity hedge funds can redu http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_equity market neutral Equity Market Neutral funds take long and short positions in such a way that the impact of the overall market is minimized Market neutral can imply dollar neutral beta neutral or both A dollar neutral strategy has zero net investment ie equal dollar amounts in long and short positions A beta neutral strategy targets a zero total portfolio beta ie the beta of the long side equals the beta of the short side While dollar neutrality has the virtue of simplicity beta neutrality better defines a strat http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_ETC See Exchangetraded commodities http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_ETF See Exchangetraded fund ETF http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_Eurodollars US dollar deposits placed with banks outside the US usually in a bank in Europe commonly used for setting international transactions Holders may include individuals companies banks and central banks http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_European option An option that may be exercised only on the expiration date See also Call option http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_event driven Event Driven funds tend to take advantage of pricing anomalies resulting from corporate transactions and special situations Event Driven funds' success depends on their ability to assess the probability of failure success of such corporate events This strategy includes Deal arbitrage Bankruptcydistressed Multistrategy Event driven strategies are generally characterized by a relatively high return and a significant correlation with major stock and or bond indexes http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_event risk The likelihood that an investment's value will change as the result of unexpected events such as corporate restructurings a takeover regulatory shifts or disasters http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_exchange A central marketplace which may be electronic and usually subject to established rules and regulations where buyers and sellers meet to trade futures and options contracts commodities or securities See Derivatives clearing organization Exchanges include designated contract markets and derivatives transaction execution facilities See Electronic trading facility http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_exchange of futures for swaps A privately negotiated transaction in which a position in a physical delivery futures contract is exchanged for a cashsettled swap position in the same or a related commodity pursuant to the rules of a futures exchange http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_exchange rate The price of one currency stated in terms of another currency http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_exchange-traded commodities ETCs are investment vehicles asset backed bonds that accurately track the performance of an underlying commodity index or subindex They enable investors to gain exposure to or invest in commodities onexchange without having to play the futures markets or risk taking delivery of the underlying itself http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_exchange-traded fund An ETF is an investment fund units of which can be bought and sold on a stock exchange They are usually used by tracker funds The key difference between ETFs and unit trusts is that they are tradeable on an exchange http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_exercise To elect to buy or sell taking advantage of the right but not the obligation conferred by an option contract http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/E/#glossary_exposure The extent to which a hedge fund is vulnerable to changes in a given financial market Exposure can be measured on a net or gross basis See Gross exposure See Net exposure http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_FCM See Futures Commission Merchant FCM http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_fees See Incentive fee See Performance Fee See Management fee See Redemption fee http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_fixed income arbitrage Fixed Income Arbitrage funds try to exploit pricing anomalies within Fixed Income Markets They generally attempt to hedge out most interest rate risk by taking offsetting positions in similar securities government bonds corporate bonds assetbacked securities etc There are two major categories of fixed income arbitrage strategies: see Relative value and Market neutral http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_floor broker A person with exchange trading privileges who in any it ring post or other place provided by an exchange for the meeting of persons similarly engaged executes for another person any orders for the purchase or sale of any commodity for future delivery http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_floor trader A member of a stock or commodities exchange who trades on the floor of that exchange for his or her own account May also execute trades for third parties and may be referred to as a quot;localquot; http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_foreign exchange market Also known as Forex http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_Forex Refers to the OTC market for foreign exchange transactions Also called the Foreign exchange market http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_forward A private overthecounter OTC derivative instrument that requires one party to sell and another party to buy a specific security or commodity at a preset price on an agreedupon date in the future Similar to a futures contract which is traded on an exchange http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_forward rate agreements A forward rate agreementFRA is an agreement whereby the seller guarantees the buyer a specific rate of interest for a specific period of time commencing on a specified date in the future A FRA is frequently used to hedge the floating rate risk in a swap transaction FRAs are conceptually similar to interest rate futures offering advantages of precise tailoring to specific transactions such as swaps but having the disadvantages that they do not trade on an exchange are not marginable and as with a http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_FRA See Forward rate agreements http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_front office Term used to identify investment industry personnel who deal directly with the public usually sales or trading personnel http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_front running With respect to commodity futures and options taking a futures or option position based upon nonpublic information regarding an impending transaction by another person in the same or related future or option Also known as Trading ahead http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_fund administrator See Administrator http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_fund of funds manager Manager of a fund that invests in a series of hedge funds The portfolio will typically diversify across a variety of investment managers investment strategies and subcategories http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_Fund of funds;fund of funds Funds of funds are portfolios of hedge funds offering investors exposure to a wide range of alternative investment styles and strategies Funds of funds generally allocate capital to 1530 hedge funds to achieve efficient risk diversification Nevertheless a smaller number of funds may be used to concentrate capital on a particular strategy Such funds of hedge funds aim to post high returns and are more concerned by manager and event risks Conversely a larger number of funds may be used to control http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_fund timing Fund timers use mutual funds to implement shortterm directional trades primarily in the equity markets either going long units in the mutual fund or remaining in cash Fund timing may be practiced in order to exploit purported leaderfollower relationships in international markets Alternatively fund timers may benefit from the arbitrage opportunities presented by funds being priced only once per day Mutual funds could also be used to express views on sector rotation So called ldquo;latetradingrdqu http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_Fund;fund The Fund is a collective investment scheme typically established in the following ways: 1 In offshore jurisdictions such as the Cayman Islands the Fund will usually be established as a Limited Liability Company 2 Funds established under the laws of a US state such as Delaware usually take the form of a Limited Liability Partnership 3 Some Funds in offshore jurisdictions are established as Unit Trusts although this is a comparatively rare structure The Fund has legal identity but in practice deci http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_fundamental analysis The underlying proposition of fundamental analysis is that there is a basic intrinsic value for the aggregate stock market various industries or individual securities and that these depend on underlying economic factors The identification and analysis of relevant variables combined with the ability to quantify the future value of these variables are key to achieving superior investment results A wide range of financial information is evaluated in fundamental analysis including such income statem http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_fundamental approach See Fundamental analysis http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_futures A future is an exchangetrade derivative instrument that involves a contract to buy or sell an asset stock index commodity currency fixed income or other security for delivery at a future date at a specific price Futures can be traded on an exchange until they expire See Derivatives clearing organization The exchange acts as the buyersrsquo; or sellersrsquo; counterparty This implies that there is no counterparty risk and that since the exchange acts as the counterparty it is possible to buy a co http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/F/#glossary_Futures Commission Merchant In the US an entity involved in the solicitation or acceptance of commodity orders for future delivery of commodities related to the futures contract marketA futures commission merchant is able to handle futures contract orders as well as extend credit to customers wishing to enter into such positions These include many of the brokerage companies that investors in the futures markets deal with http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/G/#glossary_GAAP See Generally Accepted Accounting Principles http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/G/#glossary_gain-loss ratio The GainLoss Ratio is the ratio of the expectation under a threshold risk adjusted probability measures of the positive part of the excess payoffs of a portfolio to the expectation of the negative part of the excess payoffs of a portfolio http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/G/#glossary_gearing See Leverage http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/G/#glossary_General Partner The individual or firm that organises and manages a limited partnership such as a hedge fund The general partner assumes unlimited legal responsibility for the liabilities of a partnership as opposed to the limited partners whose liability is limited to the extent of their investment in the limited partnership http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/G/#glossary_Generally Accepted Accounting Principles Convention rules and procedures that define accepted accounting practice including broad guidelines as well as detailed procedures eg in the US UK and EU http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/G/#glossary_give up A contract executed by one broker the execution broker for the client of another broker that the client orders to be turned over to a second broker the carrying or clearing broker The execution broker collects a fee from the carrying broker http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/G/#glossary_global macro Global Macro funds aim to profit from changes in global economies typically brought about by shifts in government policy that impact interest rates in turn affecting currency stock and bond markets They participate in all major markets ndash; equities bonds currencies and commodities ndash; though not always at the same time Global Macro funds use leverage and derivatives to accentuate the impact of market moves They also utilize hedging but the leveraged directional investments tend to have the http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/G/#glossary_governing body A Governing Body generally supervises and oversees the conduct of its Fund's affairs even though it will delegate daytoday functions to other parties such as the Investment Manager and Administrator The composition of the Governing Body will depend upon the Fund's structure and jurisdiction: 1 A Fund established as a Company will have a Board of Directors as the Governing Body The Board may include representatives of the Investment Manager and directors selected by the Investment Manag http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/G/#glossary_gross exposure Gross exposure is calculated by adding the percentage of the fund's equity invested in short sales to the percentage of its equity used for long positions In both cases the exposures often exceed 100 because they do not account for the use of leverage See also Net exposure http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/G/#glossary_guarantor A third partyindividual company or trust to a Margin Lending facility who provides collateral in the form of cash securities or managed funds to support a Margin Loan http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/H/#glossary_haircut The amount by which a lender discounts the actual market value of collateral pledged by a borrower http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/H/#glossary_hedge fund administrator See Administrator http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/H/#glossary_hedge fund manager Manager of one or more Hedge funds See Hedge fund http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/H/#glossary_hedge fund;Hedge fund There is no standard internationallegal 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 andor 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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/H/#glossary_hedging The process of protecting the value of an investment from the risk of loss in case of an adverse price movement http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/H/#glossary_high water mark The existence of the high water mark ensures that a fund only takes performancerelated fees on new profits For example assume a 1000000 investment is made and that the fund declines by 20 in year 1 leaving 800000 in the fund In year 2 the fund returns 25 bringing the investment value back to 1000000 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 ie the fund did not make any new profits The fund will only t http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/H/#glossary_high yield High Yield strategies invest in subinvestment 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 mispriced relative to other debt of the same com http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/H/#glossary_historical volatility A statistical measure of the volatility of a futures contract security or other instrument over a specified number of past trading days http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/H/#glossary_holder See Buyer http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/H/#glossary_hurdle rate The minimum return necessary for a fund manager to start collecting incentiveperformance fees The hurdle rate may be a fixed percentage or tied to a benchmark rate such as Libor or the oneyear 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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_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 inthemoney 10 dollars http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_incentive fee See Performance fee http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_inception date The day on which a fund starts trading http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_instrument 1 A legal document in which a contractual relationship is given formal expression to or by which some right is granted eg 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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_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 quot;capquot; 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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_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 quot;floorquot; below which interest rate receipts cannot fall a downward hedge for the buyer See also Interest rate cap http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_intermediary A person or institution who acts on behalf of another person to make investment decisions conduct transactions or who acts as a middleman between investors and firms raising funds In connection with futures trading an intermediary may be a Futures Commission Merchant Introducing Broker Commodity Pool Operator Commodity Trading Advisor or an Associated Person http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_International Swaps and Derivatives Association (ISDA) A trade association of participants in the market for OTC derivates headquartered in New York It has created a standardised contract the quot;ISDA Master Agreementquot; and a set of definitions the quot;ISDA Definitionsquot; which provide the framework for transaction documents covering swap and derivative transactions typically interest rate commodity and foreign exchange rates swaps between counterparties http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_intrinsic value A measure of the value of an option or a warrant if immediately exercised that is the extent to which it is inthemoney The amount by which the current price for the underlying commodity or futures contract is above the strike price of a call option or below the strike price of a put option for the commodity or futures contract http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_introducing broker;Introducing Broker In the US a person other than a person registered as an Associated Person of a Futures Commission Merchant who is engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on an exchange who is not authorised to accept any money securities or property to margin guarantee or secure any trades or contracts that result there from http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_investment advisor See Investment manager http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_investment manager Often referred to as the Investment Advisor in the United States The Investment Manager enters into an agreement with the Fund to make investment decisions on its behalf usually on a discretionary basis in return for a management fee based on NAV and a performance fee a percentage of NAV appreciation over a given period The Performance fee is sometimes also referred to as an Incentive fee http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_investment statement The document describing features of a product and its associated terms and conditions http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_investor See Eligible investor See Accredited investor Investors in hedge funds can be categorised in many ways but the most clear distinction is between fund of hedge funds managers and direct investors: 1 Fund of hedge funds managers: These entities manage diversified portfolios of hedge funds usually in the form of collective investment schemes and provide their investors with services such as fund selection and risk management in return for a fee 2 Direct investors: Hedge funds are aimed primarily at http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_IRR See Interest rate of return http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/I/#glossary_ISDA See International Swaps and Derivatives Association ISDA http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/J/#glossary_joint back office A clearing operation that a hedge fund jointly owns with a prime broker for the purpose of exceeding the US Federal Reserve's Regulation T limits on margin borrowing By assuming an ownership stake in such a clearing operation a fund can effectively render all transactions with its prime broker as internal transfers giving the prime broker the ability to reduce margin loan requirements substantially under Regulation T By setting up a joint back office a hedge fund can borrow an amount equal http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/J/#glossary_Jones model An investment approach developed by former journalist Alfred Winslow Jones who is said to have created the first hedge fund in 1949 Unlike traditional longonly mutual funds the Jones model involved a limited partnership that employed a longshort investment strategy thus hedging the portfolio against market fluctuations Jones who was committed to capital preservation targeted absolute returns rather than a return that was correlated to the broad stock market He charged investors a performance eq http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/J/#glossary_junior debt Debt over which senior debt takes priority In the event of bankruptcy subordinated debtholders receive payment only after senior debt is paid in full A subordination of security interest in property allows another creditor to have the rights to the proceeds of the sale of that property before the claim of the subordinated creditor http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_last trading day Day on which trading ceases for the maturing current delivery month http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_letters of credit A letter of credit also referred to as an LOC or LC is a document issued by a financial institution which essentially acts as an irrevocable guarantee of payment to a beneficiary This means that if the applicant obtaining the LC fails to perform its obligations the bank pays The LC can also be the source of payment for a transaction meaning that an exporter will get paid by redeeming the letter of credit http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_leverage The borrowed money that an investor employs to increase buying power and increase its exposure to an investment Users of leverage seek to increase their overall invested amounts in the hope that the returns on their positions will exceed their borrowing costs The extent of a fund's leverage is stated either as a debttoequity ratio or as a percentage of the fund's total assets that are funded by debt Example: If a fund has 1 million of equity capital and it borrows another 2 million to http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_LIBOR The interest rate that London banks charge when lending to one another equivalent of the Federal Reserve Funds Rate in the US and used as a benchmark for other short term interest rates The LIBOR is the primary fixed income index reference rates used in the Euromarkets Most international floating rates are quoted as LIBOR plus or minus a spread http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_limit The maximum price advance or decline from the previous day's settlement price permitted during one trading session as fixed by the rules of an exchange In some futures contracts the limit may be expanded or removed during a trading session a specified period of time after the contract is locked limit http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_limit order An order in which the customer specifies a minimum sale price or maximum purchase price as contrasted with a market order which implies that the order should be filled as soon as possible at the market price http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_Limited Partnership A statutory partnership consisting of one or more general partners and one or more limited partners General partners are responsible for the daytoday management of the partnership and have unlimited liability for its debts and other obligations Limited partners play no part in the daytoday management of the partnership and are generally passive investors in the partnership and liable to the partnership only to the extent of their investment http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_liquid market A market in which selling and buying can be accomplished with minimal effect on price http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_liquidation The closing out of a long position The term is sometimes used to denote closing out a short position but this is more often referred to as covering http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_liquidity The ease with which an investment productfund can be soldredeemed from without impacting its price Hedge funds typically offer quarterly or annual liquidity meaning that they allow investors to redeem their shares that often http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_liquidity risk The potential that an investor will be unable to convert its holdings into cash quickly and in large quantities without having to accept a substantial discount The term also refers to the potential that a securities buyer will not have enough money to pay for the purchase http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_local An individual with exchange trading privileges who trades for is own account traditionally on an exchange floor and whose activities provide market liquidity See Floor trader http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_lock-up The period of time often one year during which hedgefund investors are initially prohibited from redeeming their shares http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_London Inter-Bank Offered Rate See LIBOR http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_long hedge See Buying hedge http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_long position Holding a positive amount of an asset http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_loss ratio A measure of an insurer's claims efficiency It is calculated by dividing net claims expense by net premium income http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/L/#glossary_LP See Limited Partnership http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_macro fund A hedge fund that specializes in strategies designed to profit from expected macroeconomic events http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_managed account A vehicle in which investors give a manager or broker discretion to buy and sell securities futures or other instruments on their behalf either unconditionally or with restrictions http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_managed futures fund Funds that invest in listed financial and commodity markets as well as in currency markets all over the world Most Managed Futures CTA Global Macro funds play on market momentum ie trend followers or follow discretionary strategies The others either use quantitative fundamental or technical analysis Computer programs that use technical analysis tools like relative strength indicators and momentum are used to make investment decisions The majority of these funds are specialized and on proprietar http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_managed futures manager See Commodity trading advisor http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_Management Expense Ration A ratio expressing the management trustee and certain other expenses of a pooled investment fund as a proportion of the net asset value of the fund http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_management fee A fee paid to a fund manager for managing and providing services to the fund as well as to cover certain operating expenses Investors are typically charged separately for costs incurred for outsourced services The management fee is generally expressed as a charge against investor assets and typically ranges from an annual 05 to 2 of an investor's entire holdings in the fund and usually collected on a quarterly basis http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_manipulation Any planned operation transaction or practice that causes or maintains an artificial price Specific types include corners and squeezes as well as unusually large purchases or sales of a commodity or security in a short period of time in order to distort prices and putting out false information in order to distort prices http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_many-to-many Refers to a trading platform in which multiple participants have the ability to execute or trade commodities derivatives or other instruments by accepting bids and offers made by multiple other participants http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_margin The amount of capital that has to be deposited as collateral against future losses in order to enter into an investment which gives exposure to the changes in the market value of an asset of greater value http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_margin call Occurs when a broker demands that the holder of a margin loan put up extra cash or securities as collateral for that loan usually because the value of the securities purchased with the loan has declined When such a call is made an investor has the option to put up cash to reduce the loan amount add more securities to the margin account to raise the portfolio value or sell securities in the account to reduce the loan balance In the US also known as a lsquo;Regrsquo; Regulation T call http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_margin lending A loan facility secured against a portfolio of securities where the loan may be up to 75 of the value of the portfolio Also see Cost of borrowing http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_margin loan A line of credit from a broker that provides an investormanager with capital for the purpose of purchasing securities The loan may finance up to 75 of the securities purchase and is secured by stock owned by the client Hedge funds can usually leverage themselves far more than that through other means such as joint back offices Like any form of leverage a margin loan allows investors to boost their buying power while at the same time increasing their risk The value of the securities an investor h http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_margin price The prevailing price at which to buy or sell a security on the open market http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_mark-to-market The practice of valuing positions at readily available close out prices sourced independently eg by reference to exchange prices screen prices or quotes from independent market makers http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_market maker A professional securities dealer or person with trading privileges on an exchange who has an obligation to buy when there is an excess of sell orders and to sell when there is an excess of buy orders By maintaining an offering price sufficiently higher than their buying price these firms are compensated for the risk involved in allowing their inventory of securities to act as a buffer against temporary order imbalances In the futures industry this term is sometimes loosely used to refer to a flo http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_market neutral Denotes an approach to investment where the emphasis is on the value of securities relative to each other and the use of arbitrage techniques rather than market direction forecasting By emphasizing the relative value of securities and the exploitation of pricing anomalies between related securities practitioners of market neutral approaches aim to generate profits regardless of the overall direction of broad market prices Market neutrality is generally achieved by offsetting long and short posit http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_market order An order to buy or sell a futures contract at whatever price is obtainable at the time it is entered in the ring pit or other trading platform See AttheMarket Limit Order http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_market risk See Systemic risk http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_market timer/timing A hedgefund manager that makes portfolio asset allocations based on his anticipation of movements in the broad market http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_market-on-close An order to buy or sell at the end of the trading session at a price within the closing range of prices http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_market-on-opening An order to buy or sell at the beginning of the trading session at a price within the opening range of prices http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_master-feeder fund A common hedgefund structure through which a manager sets up one or more separate quot;feeder fundquot; vehicles to accommodate different types of investors eg US taxable investors US taxexempt investors and offshore investors which in turn invest in a quot;master fundquot; vehicle that often is an offshore vehicle The purpose of such an arrangement is to create a single trading vehicle for different categories of investors http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_maturity Period within which a futures contract can be settled by delivery of the actual commodity http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_MBS See Mortgagebacked securities http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_mean reversion Mean reversion models rely on the tendency of prices to overreact temporarily overshoot their usual levels when there are large flows in the market ndash; for example due to the actions of institutional investors Models generally consider baskets or clusters of stocks The arbitrageurs look to find occasions when the usual relationships between these related stocks have diverged and take positions designed to profit from the reversion to the usual relationship The main Mean reversion strategy is http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_memorandum See Prospectus http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_MER See Management Expense Ratio MER http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_merger arbitrage Merger Arbitrage funds invest in companies involved in a merger or acquisition process They typically go long the targeted company and sell short the stock of the acquiring company This strategy aims to capture the price spread ie Merger Spread between the current market price of the targeted company and the price offered by the acquiring firm The performance of Merger Arbitrage funds depends on their ability to assess the probability of success failure of the corporate transactions The exposur http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_mezzanine debt Mezzanine debt or mezzanine capital is a broad financial term that refers to unsecured highyield subordinated debt or preferred stock that represents a claim on a company's assets that is only senior to that of a company's shareholders http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_micro cap See Small cap http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_middle office With the front and back offices the middle or mid office completes the key best practice division of duties and responsibilities in a finance and investment operation Its basic responsibilities include treasury activities reporting accounting monitoring and internal control Most companies may not have operations sizeable enough to require a middle office; in these cases its role is performed by the back office or the accounting department http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_mini Refers to a futures contract that has a smaller contract size than an otherwise identical futures contract http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_minimum investment The smallest amount that an investor is permitted to contribute to a hedge fund as an initial investment Minimum investment requirements can range from US50000 to 5 million but most funds insist on 500000 to 1 million The amount is set by the manager and can be dependent on the manager'sfund's domicile's definition of an accredited investor http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_momentum The speed of price change over a period of time Momentum based investment styles notably trend following approaches aim to capitalise on the acceleration in directional price movements be they upward or downward http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_money market The market for shortterm debt instruments http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_Monte Carlo simulation A mathematical technique used to model the price characteristics of an investment structure based on random simulations of the underlying assets or variables that affect the price of that investment In the context of the modelling carried out at Man the analysis involves constructing multiple NAV paths for a product net of all appropriate fees and interest using random samples of gross returns The price characteristics that can be modelled using this powerful technique are known as lsquo;pathdep http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_mortgage-backed securities A common instrument in fixed income arbitrage strategies MBS are created when home loans are pooled and packaged into new instruments whose holders are entitled to some share of the cashflow received from underlying mortgage loans A key characteristic of these instruments is prepayment risk which relates to the uncertainty in the timing of cashflows Arbitrageurs may either buy MBS and attempt to hedge out their prepayment risk or exploit relative mispricings between different MBS http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/M/#glossary_multi-strategy (for Event driven strategy) Deals with both Deal arbitrage and Bankruptcy http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/N/#glossary_National Futures Association The US National Futures Association a self regulatory organisation for the futures industry in the United States http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/N/#glossary_NAV See Net asset value http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/N/#glossary_net asset backing The total amount of shareholders' funds invested in a company less liabilities divided by the number of shares on issue http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/N/#glossary_net asset value 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 Hedge funds typically calculate their NAVs at the end of every business day but report them to investors on a monthly basis Mutual funds report their NAVs daily http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/N/#glossary_net exposure Net exposure takes into account the benefits of offsetting long and short positions and is calculated by subtracting the percentage of the fund's equity capital invested in short sales from the percentage of its equity capital used for long positions For example if a fund is 125 long and 50 short its net exposure would be 75 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/N/#glossary_net position The difference between the open long contracts and the open short contracts held by a trader in any one commodity http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/N/#glossary_net-fee requirement This is dependent on the fund domicile; for instance an SEC rule stating that hedge fund managers and other types of investment advisors must deduct quot;advisory feesquot; they charge from any performance figures they present to prospective investors http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/N/#glossary_NFA See National Futures Association http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/N/#glossary_notional assets under management See Assets under management http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_off-exchange See Overthecounter http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_offer An indication of willingness to sell at a given price; opposite of Bid http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_offer document A term used for a document combining a prospectus and an investment statement http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_offering memorandum See Prospectus http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_offset Liquidating a purchase of futures contracts through the sale of an equal number of contracts of the same delivery month or liquidating a short sale of futures through the purchase of an equal number of contracts of the same delivery month See Closing out http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_offshore fund An investment vehicle that is domiciled outside the managerrsquo;s domicile typically in a jurisdiction with no or very low taxes such as Bermuda British Virgin Islands Cayman Islands Dublin or the Channel Islands and has no limit on the number of investors it can take on Although the fund's securities transactions occur on onshore exchanges and are executed by an onshore manager or general partner its administration and audits are conducted offshore usually in a tax haven like the Cayman I http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_Omega;omega Omega is the probability weighted ratio of gains to losses relative to a predefined return threshold It captures all of the higher moment information in the returns distribution and also incorporates sensitivity to return levels http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_open outcry A method of trading common to most US futures or options exchanges where trading occurs on a trading floor and traders may bid and offer simultaneously either for their own accounts or for the accounts of customers Transactions may take place simultaneously at different places in the trading pit or ring At almost every exchange outside the US open outcry has been replaced by Electronic Trading Platforms See Specialist system http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_open-ended product/fund A product that is permanently open for investment New units shares bonds units are created or dissolved as required Investors can subscribe for or redeem these units at the prevailing net asset value per unit in accordance with the details set out in the relevant productfund prospectus http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_opening The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made quot;at the openingquot; http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_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 manmade disasters http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_opportunistic value An approach that seeks to produce the greatest possible returns by assuming longterm positions in the mostefficient products at a given time Such funds which often pursue longshort 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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_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 ldquo;strikerdquo; or ldquo;exerciserdquo; price See CallCall option The right to buy is known as a ldquo;callrdquo; option and the right to sell a ldquo;putrdquo; 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 th http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_option buyer The person who buys calls puts or any combination of calls and puts http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_option grantor See Option writer http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_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 riskfree interest rate eg the Treasury bill interest rate Examples of option pricing models include BlackScholes and CoxRossRubinstein http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_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 OffExchange http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_out-of-the-money A term used to describe an option that has no intrinsic value For example a call with a strike price of 400 on gold trading at 390 is outofthemoney 10 dollars http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_over-the-counter See OTC http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_overnight trade A trade which is not liquidated during the same trading session during which it was established http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/O/#glossary_owner See Buyer http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_pair trading A relative value approach that seeks to identify similar companies in a given sector whose securities are trading or are anticipated to trade at a wide differential The manager of such a fund would assume a short position in the overvalued security while taking a long position in the undervalued one http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_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 It may be paid annually or quarterly but accrues monthly in the fund valuation Also known as Incentive fee http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_performance trigger Also known as Stop Loss it is the point at which a hedge fund's losses cause specific contractual provisions designed to insulate investors from further losses http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_PIP The smallest price unit of a commodity or currency http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_PIPEs See Private Investments in Public Entities http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_pit A specially constructed area on the trading floor of some exchanges where trading in a futures contract is conducted On other exchanges the term ring designates the trading area for a commodity http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_placement The expansion of a company's capital base by selling a parcel of new securities to a single substantial investor or institution on a private placement basis and generally without the issue of a prospectus A placement could also involve selling existing shares in a company http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_portfolio efficient frontier See Efficient frontier http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_portfolio insurance A trading strategy that uses stock index futures andor stock index options to protect stock portfolios against market declines http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_portfolio manager A company or individual that runs capital on behalf of an investment fund such as a hedge fund The portfolio manager is often the general partner of the fund's limited partnership It may be an employee of the fund management firm or an external entity with which the hedge fund makes a passive investment http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_portfolio turnover rate The rate of trading activity in a hedge fund or mutual fund expressed as a percentage of the portfolio's size that is bought or sold each year Calculated by dividing the lesser of purchases or sales by average assets during that year http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_position An interest in the market either long or short in the form of one or more open contracts http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_position accountability A rule adopted by an exchange requiring persons holding a certain number of outstanding contracts to report the nature of the position trading strategy and hedging information of the position to the exchange upon request of the exchange http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_positive carry The cost of financing a financial instrument the shortterm rate of interest where the cost is less than the current return of the financial instrument http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_premium 1 The payment an option buyer makes to the option writer for granting an option contract; 2 the amount a price would be increased to purchase a better quality commodity; 3 refers to a futures delivery month selling at a higher price than another as quot;July is at a premium over Mayquot; http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_price trend See Momentum http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_primary market 1 For producers their major purchaser of commodities; 2 to processors the market that is the major supplier of their commodity needs; and 3 in commercial marketing channels an important centre at which spot commodities are concentrated for shipment to terminal markets http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_prime broker A large bank or securities firm that provides various backoffice and financing services to hedge funds and other professional investors Prime Brokers can provide a wide variety of services including trade reconciliation clearing and settlement custody services risk management margin financing securities lending for the purpose of carrying out short sales recordkeeping and investor reporting A prime brokerage relationship does not preclude hedge funds from carrying out trades with other brokers o http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_principal protection Also known as a Capital Guarantee it is an arrangement or mechanism built into an investment product whereby investors are assured that the capital value of their initial investment is secure and that at least this amount will be returned to them when such a product reaches its maturity date Principal protection features can take a variety of forms including capital guarantees provided by banks http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_principal-protected note A fixed income security that guarantees the investor a minimum portion usually 100 of his initial investment the principal amount Also known as Principal protected products and Principal protected securities http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_principal-protected products See Principalprotected note http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_principal-protected securities See Principalprotected note http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_Private Investments in Public Entities Private Investments in Public Entities are typically made by funds following a socalled ldquo;Regulation Drdquo; investment strategy There are two main types of PIPEs traditional and structured A traditional PIPE is one in which stock either common or preferred is issued at a set price to raise capital for the issuer: aprivate investment firm mutual fund or other qualified investor willpurchase a stock ina company at a discount to the current market value per share for the purpose of raising cap http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_private placement The offer and sale of any security other than by way of public offer to a limited number of investors and which if made in the US is exempt from the registration requirements under the US Securities Act of 1933 as amended See Regulation D http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_proforma A representation of a track record see lsquo;Track Recordrsquo; that is developed to show the effect on actual performance of intended or potential adjustments for different fee structures portfolio allocations or other variations in the investment structure upon which the original track record is based It is important to note that a proforma is based on actual trading results and differs from a simulation which models the hypothetical performance of a portfolio or investment approach that has y http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_program trading The purchase or sale of a large number of stocks contained in or comprising a portfolio Originally called program trading when index funds and other institutional investors began to embark on largescale buying or selling campaigns or quot;programsquot; to invest in a manner that replicates a target stock index the term now also commonly includes computeraided stock market buying or selling programs and index arbitrage http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_proprietary account An account that a Futures Commission Merchant carries for itself or a closely related person such as a parent subsidiary or affiliate company general partner director Associated Person or an owner of ten percent or more of the capital stock The FCM must segregate customer funds from funds related to proprietary accounts http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_prospectus The official document issued by a fund prior to its launch to describe the shares being offered to prospective investors The information provided in the prospectus will be prescribed by regulators according to the type of investor to whom the fund is being promoted and the investment strategy proposed A prospectus must generally include the characteristics of the proposed fund such as investment objective and policies services and fees Investors are encouraged to read and understand a fund' http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/P/#glossary_put An option contract that gives the holder the right but not the obligation to sell a specified quantity of a particular commodity or other interest at a given price the quot;strike pricequot; prior to or on a future date http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/Q/#glossary_qualified investor See Accredited investor http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/Q/#glossary_qualitative analysis Analysis that uses subjective judgment to evaluate securities fund managers administrators etc based on nonfinancial information such as management expertise cyclicality of industry strength of research and development labour relations and depth of operational infrastructure Qualitative analysis evaluates important factors that cannot be precisely measured rather than the actual financial data about a company http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/Q/#glossary_quantitative analysis Quantitative analysis deals with measurable factors in contrast from qualitative considerations such as the character of management http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_R-squared See correlation http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_rally An upward movement of prices http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_random walk An economic theory that market price movements move randomly This assumes an efficient market The theory also assumes that new information comes to the market randomly Together the two assumptions imply that market prices move randomly as new information is incorporated into market prices The theory implies that the best predictor of future prices is the current price and that past prices are not a reliable indicator of future prices If the random walk theory is correct Technical Analysis cannot http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_range The difference between the high and low price of a commodity futures or option contract during a given period http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_rate of return The percentage change in the fundrsquo;s share price over a specified period of time ie monthly annually It is calculated as final share price initial share price initial share price Sometimes referred to a simply the quot;returnquot; http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_redemption Liquidation of shares or interests in an investment fund http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_redemption fee A fee charged by the fund to investors who redeem fund shares usually within a short space of time intended to discourage early withdrawals http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_redemption notice period The amount of advance notice that an investor must give a hedge fund manager before cashing in shares of the fund Notification is required in writing http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_registrar The organisation that maintains a registry of the share owners and number of shares held for a hedge fund Usually the Fund's Administrator also performs the role of Registrar http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_Regulation D A set of rules under the US Securities Act of 1933 as amended that provide a quot;safe harbourquot; for the private offering of securities in the United States without the requirement to register the offering with the SEC As a condition for relying on the Regulation D safe harbour the issuer may not engage in any general solicitation of the securities ie advertise or market to the general public See Private Placement http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_regulator Independent organisation usually governmental that oversees financial markets transactions and participants Often seen as the protector of individual investors Most but not all hedge fund Investment Managers are registered with their national Regulator http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_relative value This strategy seeks to construct a portfolio which takes advantage of the pricing anomalies detected while maintaining a diversified risk profile Neutrality with regard to the duration is not systematically targeted The main objective is to maximize the portfolio's return while controlling the risk http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_replicating portfolio A portfolio of assets for which changes in value match those of a target asset For example a portfolio replicating a standard option can be constructed with certain amounts of the asset underlying the option and bonds Sometimes referred to as a Synthetic Asset http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_reporting agent A thirdparty individual or company that verifies a fund's performance figure http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_return See Total return http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_risk See Downside risk See Event risk See Liquidity risk See Market risk See Systemic risk See Systematic risk See Operational risk See Unsystematic riskunique risk See ValueatRisk VaR http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_risk arbitrage Purchasing stocks of companies that are likely takeover targets while assuming short positions in the wouldbe acquiring companies Risk arbitrage players can employ an eventdriven investment strategy or merger arbitrage investment strategy seeking situations such as hostile takeovers mergers and leveraged buyouts http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_risk-adjusted performance Risk relative to return: the return achieved per unit of risk or the risk associated with a particular level of reward typically represented by the Sharpe ratio see 'Sharpe ratio' Also see 'Sortino Ratio' Improving the riskadjusted return depends either on increasing returns without a commensurate increase in the level of risk or maintaining the level of returns whilst lowering the associated risk http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_risk-free rate The theoretical return on a riskfree investment http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/R/#glossary_roll-over A trading procedure involving the shift of one month of a straddle into another future month while holding the other contract month The shift can take place in either the long or short straddle month The term also applies to lifting a near futures position and reestablishing it in a more deferred delivery month http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_scalper A speculator on the trading floor of an exchange who buys and sells rapidly with small profits or losses holding his positions for only a short time during a trading session Typically a scalper will stand ready to buy at a fraction below the last transaction price and to sell at a fraction above thus creating market liquidity See Day Trader http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_seat An instrument granting trading privileges on an exchange A seat may also represent an ownership interest in the exchange http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_sector Investments in securities issued by companies that operate in a particular industry sector such as finance energy healthcare or hightech Some managers pursue multisector strategies that involve more than one sector http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_secured debt Debt backed by a mortgage pledge of collateral or other lien; debt for which the creditor has the right to pursue specific pledged property upon default http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_security Generally a transferable instrument representing an ownership interest in a corporation equity security or stock or the debt of a corporation municipality or sovereign Other forms of debt such as mortgages can be converted into securities Certain derivatives on securities eg options on equity securities are also considered securities for the purposes of the applicable securities laws Security Futures Products are considered to be both securities and futures products Futures contracts on BroadBas http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_self-regulatory organisation Exchanges and registered associations that enforce financial and sales practice requirements for their members http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_senior debt A senior debt issue ranks before other issues in terms of claims on assets in the event of a company breakup For example senior bonds rank before junior bonds which rank before senior debentures which rank before junior debentures etc http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_service agreements The agreements between a fund and its various service providers including administration and prime brokerage agreements http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_settlement The act of fulfilling the delivery requirements of a securities or futures contract http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_settlement price The daily price at which the clearing organisation clears all trades and settles all accounts between clearing members of each contract month Settlement prices are used to determine both margin calls and invoice prices for deliveries The term also refers to a price established by the exchange to even up positions which may not be able to be liquidated in regular trading http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_Sharpe ratio A measure of riskadjusted performancehow well a fund is rewarded for the risk it incurs The higher the ratio the better the return per unit of risk taken It is calculated by subtracting the riskfree rate from the fund's annualized average return and dividing the result by the fund's annualized standard deviation A Sharpe ratio of 1:1 indicates that the rate of return is proportional to the risk assumed in seeking that reward A measure of more than 1 by the manager means heshe is skille http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_short 1 The selling side of an open futures contract; 2 a trader whose net position in the futures market shows an excess of open sales over open purchases See Long position http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_short selling Short Selling funds sell securities short in anticipation of being able to buy them back in the future at a lower price The manager estimates that the securities or the market are overvalued or anticipates earnings disappointments often due to accounting irregularities new competition change of management etc Short Selling funds are often used as a hedge to offset longonly portfolios and by those who feel that the market is approaching a bearish cycle Short Selling funds are by nature strongly e http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_short squeeze A market situation in which the lack of supplies tends to force shorts to cover their positions by offset at higher prices http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_short-term trading An approach in which the fund manager focuses on opportunistic trades holding investments for only brief periods Such funds often engage in quot;day tradingquot; http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_side letters A letter agreement usually negotiated between a manager and an investor in respect of an investment in a fund containing terms which may be more preferable to those offered in the fundsrsquo; offer document Such terms may offer the investor reduced fees special redemption rights special reporting rights etc http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_slippage The difference between the sample or target price for buying or selling an asset and the actual price at which the transaction takes place http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_small cap/micro cap Purchasing stocks issued by small companies Smallcap companies generally have 250 million to 1 billion of market capitalization while microcap companies have less than 250 million of market capitalization http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_soft dollars Credits that can be used to pay for research and other services that brokerage firms provide to hedge funds and other investor clients in return for their business http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_sophisticated investor See Accredited investor http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_Sortino ratio A measure of riskadjusted performance that indicates the level of excess return per unit of downside risk It differs from the Sharpe ratio see Sharpe ratio in that it recognises investorsrsquo; greater tolerance for volatility in profitable periods lsquo;good volatilityrsquo; compared with their tolerance for volatility in periods of negative performance lsquo;bad volatilityrsquo; and uses a measure of lsquo;bad volatilityrsquo; as provided by semideviation the annualised standard deviation of http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_special situations An eventdriven investment strategy in which the manager seeks to take advantage of unique corporate situations that provide the potential for investment gains See Event driven http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_specialist system A type of trading commonly used for the exchange trading of securities in which one individual or firm acts as a market maker in a particular security with the obligation to provide fair and orderly trading in that security by offsetting temporary imbalances in supply and demand by trading for the specialist's own account See Open outcry http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_speculative bubble A rapid runup in prices caused by excessive buying that is unrelated to any of the basic underlying factors affecting the supply or demand for a commodity or other asset Speculative bubbles are usually associated with a quot;bandwagonquot; effect in which speculators rush to buy the commodity in the case of futures quot;to take positionsquot; before the price trend ends and an even greater rush to sell the commodity unwind positions when prices reverse http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_speculator In commodity futures an individual who does not hedge but who trades with the objective of achieving profits through the successful anticipation of price movements http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_spot Market of immediate delivery of and payment for the product http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_spot price The price at which a physical commodity for immediate delivery is selling at a given time and place http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_spread 1 The difference in the value between the Bid and Offer prices 2The purchase of one futures delivery month against the sale of another futures delivery month of the same commodity; the purchase of one delivery month of one commodity against the sale of that same delivery month of a different commodity; or the purchase of one commodity in one market against the sale of the commodity in another market to take advantage of a profit from a change in price relationships The term spread is also used t http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_squeeze A market situation in which the lack of supplies tends to force shorts to cover their positions by offset at higher prices http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_SRO See Selfregulatory Organisation http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_standard deviation For an investment portfolio it measures the variation of returns around the portfolios meanaverage return In other words it expresses an investment's historical volatility The further the variation from the average return the higher the standard deviation http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_statistical arbitrage A Marketneutral investment strategy that seeks to simultaneously profit and limit risk by exploiting pricing inefficiencies identified by mathematical model designed on the assumption that prices will trend toward their historical norms See Mean reversion The strategy often involves high velocity and high volume trading of shortterm positions http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_sterling ratio This is a returnrisk ratio Return numerator is defined as the Compound Annualized Rate of Return over the last 3 years Risk denominator is defined as the Average Yearly Maximum Drawdown over the last 3 years less an arbitrary 10 To calculate this average yearly drawdown the latest 3 years 36 months is divided into 3 separate 12month periods and the maximum drawdown is calculated for each Then these 3 drawdowns are averaged to produce the Average Yearly Maximum Drawdown for the 3year period If th http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_stock-futures arbitrage An approach that seeks to take advantage of differences between a stock's current price and its expected future price by buying a group of stocks and shorting futures contracts in the corresponding index or by purchasing the futures contracts and short selling the stock http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_stop loss See Performance trigger http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_stop order This is an order that becomes a market order when a particular price level is reached A sell stop is placed below the market http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_straddle 1 See Spread; 2 an option position consisting of the purchase of put and call options having the same expiration date and strike price http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_strategy The particular investment process employed by a manager in the application of an investment style http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_stress testing A simulation technique used on asset and liability portfolios to determine their reactions to different financial situations http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_structured product Typically provides principal protection see Principal protection invests across a range of styles and managers provides increased investment exposure see Leverage and requires a high level of structuring expertise with respect to blending investment approaches financing liquidity and risk management http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_style A generic investment approach such as equity hedge and longshort 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 fe http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_support In technical analysis a price area where new buying is likely to come in and stem any decline http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_survivorship bias An overestimation of historic returns for the hedge fund industry that results from the tendency of poorperforming 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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_swaption An option to enter into an interest rate swap http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_synthetic asset See Replicating portfolio http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_systematic risk Systematic risk is the level of risk that is faced by a welldiversified portfolio It is sometimes known as ldquo;market riskrdquo; 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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_systematic trading Systematic Trading strategies use rulebased trading models implemented in a systematic fashion to identify and execute trading opportunities with limited manager intervention http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/S/#glossary_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 http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_T+1 The trade requirements defining 'T' as the day the trade is executed and '1' stipulating settlement must be made one business day following the day of trade Likewise T3 stipulates settlement is made on the third business day http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_T-bills See Treasury bills http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_T-bonds See Treasury bonds http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_taker See Buyer http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_TAR See Trading advisor report http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_technical analysis An approach to forecasting commodity prices that examines patterns of price change rates of change and changes in volume of trading and open interest without regard to underlying fundamental market factors Technical analysis can work consistently only if the theory that price movements are a Random Walk is incorrect http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_ted spread The difference between the price of the threemonth US Treasury bill futures contract and the price of the threemonth Eurodollar time deposit futures contract with the same expiration month http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_tick Refers to a minimum change in price up or down An uptick means that the last trade was at a higher price than the one preceding it A downtick means that the last price was lower than the one preceding it http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_top-down investment process An approach that seeks to assess the influence of various macroand microeconomic factors before identifying individual investments http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_total return The total percentage return of an investment over a specified period calculated by expressing the difference between the investment's initial price and final price as a percentage of the initial price http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_track record The actual performance of an investment since inception usually represented by audited monthly returns net of fees http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_tracking error Also known as Active risk http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_trader 1 A merchant involved in cash commodities; 2 a professional speculator who trades for his own account and who typically holds exchange trading privileges http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_trading advisor report A performance report produced by an investment manager that is made available usually on a monthly basis to clients with holdings in a particular product The report details the change in net asset value of a product and explains performance in light of market conditions as well as any relevant portfolio changes and developments http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_trading ahead Also known as Front running http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_trading arcade A facility often operated by a clearing member that clears trades for locals where elocals who trade for their own account can gather to trade on an electronic trading facility especially if the exchange is allelectronic and there is no pit or ring http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_trading facility A person or group of persons that provides a physical or electronic facility or system in which multiple participants have the ability to execute or trade agreements contracts or transactions by accepting bids and offers made by other participants in the facility or system See ManytoMany http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_trading floor A physical trading facility where traders make bids and offers via open outcry or the specialist system http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_transaction The entry or liquidation of a trade http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_treasury bills Also known as Tbills shortterm zero coupon US government obligations generally issued with various maturities of up to one year http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_treasury bonds Also known as Tbonds Longterm more than ten years obligations of the US government that pay interest semiannually until they mature at which time the principal and the final interest payment is paid to the investor http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_treasury notes Same as Treasury Bonds except that Treasury Notes are mediumterm more than one year but not more than ten years http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_trend The general direction either upward or downward in which prices have been moving http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/T/#glossary_trendline In charting a line drawn across the bottom or top of a price chart indicating the direction or trend of price movement If up the trendline is called bullish; if down it is called bearish http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/U/#glossary_under-valued The view after consideration of statistical and fundamental research that a security or currency is trading below market value http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/U/#glossary_unit A generic term used to describe the 'instrument' share bond loan note participation interest etc which is issued by a product Investors invest in a product by subscribing for units and can also redeem their units at the prevailing net asset value per unit as detailed in the relevant product prospectus http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/U/#glossary_unsystematic risk/unique risk Unsystematic risk is the potential variability in the returns offered by a security as a result of factors specific to its issuer For company shares for example the quality of its management affects its specific risk This type of risk is diversifiable because the specific risks of different securities will not all be highly correlated with each other hence combining them in a portfolio reduces its unsystematic risk http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/V/#glossary_valuation committee Some Governing Bodies delegate oversight of the valutaion process to a Valuation Committee This may be a subcommittee of the main Governing Body or a separately constituted Committee http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/V/#glossary_valuation service provider See Administrator http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/V/#glossary_value An approach that involves purchases of stocks that the manager deems to be priced below their intrinsic values or are out of favour with the market but are still fundamentally solid Such funds typically employ longterm holding periods http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/V/#glossary_value-added monthly index VAMI the value that 1000 allocated to an investment fund on its inception date would currently have assuming that all profits and distributions were reinvested http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/V/#glossary_Value-at-Risk A measure of the potential change in value that a fund's portfolio may experience during that vehicle's holding period It is usually expressed as a percentage which is referred to as a confidence level http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/V/#glossary_VAMI See valueadded monthly index http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/V/#glossary_VaR See ValueatRisk VaR http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/V/#glossary_vertical spread Any of several types of option spread involving the simultaneous purchase and sale of options of the same class and expiration date but different strike prices including bull vertical spreads bear vertical spreads back spreads and front spreads http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/V/#glossary_volatility A statistical measurement of the rate of price change of a futures contract security or other instrument underlying an option See Historical Volatility Implied Volatility http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/V/#glossary_volatility arbitrage An approach by which a manager seeks to take advantage of fluctuations and inefficiencies in financial markets usually the stock market A common form of volatility arbitrage is an option arbitrage investment strategy which can be carried out as a marketneutral investment strategy or with a long bias toward volatility http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/V/#glossary_volatility trading Strategies designed to speculate on changes in the volatility of the market rather than the direction of the market http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/V/#glossary_volume of trade The number of contracts traded during a specified period of time It may be quoted as the number of contracts traded or as the total of physical units such as bales or bushels pounds or dozens http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/W/#glossary_warrant A contract that gives an investor the rights to purchase a security at a specific price usually above the current price on a future date It is usually issued with a bond or preferred stock to provide additional incentive to the buyer Warrants are similar to options contracts but unlike options they can stay in effect for a period ranging from a few years to eternity http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/W/#glossary_warrant or warehouse receipt for metals Certificate of physical deposit which gives title to physical metal in an exchangeapproved warehouse http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/W/#glossary_weather derivative A derivative whose payoff is based on a specified weather event for example the average temperature in Chicago in January Such a derivative can be used to hedge risks related to the demand for heating fuel or electricity http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/Y/#glossary_yield The return earned on an investment with the annual income and present capital value taken into account http://www.aima.org/en/knowledge_centre/education/glossary.cfm/letter/Y/#glossary_yield curve A graphic representation of market yield for a fixed income security plotted against the maturity of the security