Glossary (A-Z)

Alternative Investments- This term encompasses any non-traditional asset class. For example they include venture capital, private equity, hedge funds and real estate.

Alpha- A numeric value representing the excess rate of return to a given benchmark.

Arbitrage Strategies- A strategy where a manager buy's a securities at a temporary price gap by buying the cheaper stock and selling short the more expensive one.

Asset Allocation- Percent of a person or an entities total capital distributed to different asset classes.

Beta- This is a historical measure of an investments sensitivity to market movements. Beta is based on historical performance therefore it is not an indication of what the investment performance will be in the future.

Bottom-up Investing- This approach takes a look at the fundamentals of specific companies as apposed to top-down where they centre their approach on the evaluation of economic trends.

Buy out- This is the purchase of a company or the controlling interest of the corporations shares.

Closed ended funds- A fund that has stopped accepting capital from investors, usually because of speedy asset growth.

Convertible arbitrage strategy- This tactic profits from pricing differences or inefficiencies between the values of convertible bonds and common stock issued by the same company.

Convexity- Convexity relates to the shape of the price/yield relationship in a fixed income instrument.

Distressed Securities- Companies that are usually going through bankruptcy or reorganization. Managers buy these companies at bargain prices and resell if the company recovers.

Drawdown- This is the percentage of loss that a fund incurs from its highest value to its lowest value. The maximum drawdown over time is sometimes a way to measure the risk of a fund.

Emerging Markets- Investment in the securities of companies located in developing countries.

Equity Market Neutral- This is where a manager takes an equal position on both the short and long side thereby he will theoretically maintain a neutral exposure to the market.

Event-Driven/Opportunistic- An investment strategy that looks for profits from special situations to capitalize on price fluctuations or imbalances. This strategy has no commitment to any particular style or asset class.

Evergreen fund- this is a fund that takes the returns and puts them back into the fund rather than being distributed back to investors. The goal is to keep a continuous supply of capital for new investments.

Exit- Private equity professionals watch for the exit from the beginning of the business plan. An exit is the means by which a fund is able to realise its investment in a company. This could be in the form of a buy out, IPO or trade sale.

First time fund- This is the first time this particular private equity fund has raised money.

Follow-on funding- Sometimes companies need many rounds of funding. If a private equity firm has given money in the past and then provides additional capital at a later stage this is known as follow on funding.

Fund of Funds- A fund that invests in a portfolio of hedge funds. Or it could be a fund that invests in a portfolio of private equity funds.

Gatekeeper- An advisor who assists institutional investors in both private equity and hedge fund decisions.

General Partner- The individual or firm that organizes and manages the limited partnership. For example a hedge fund. The GP assumes unlimited legal responsibility for the liabilities of a partnership.

Hedge Fund- These are a subset of the alternative investment asset class. It can incorporate a wide range of investment strategies and instruments.

High water Mark- This is the loss carried forward. That is, if you made £1000 the first year and a £1000 the next year, then you lose £1000 in the third and forth year, you are not really even. Rather the GP must make back your initial £2000 gain before he can take out the performance fee.

Hurdle Rate- Is the minimum return necessary for a fund manager to start collecting fees. The hurdle usually reflects a benchmark such as Libor.

Incubator- Is an entity designed to nurture business ideas or new technologies to the point that they become attractive to venture capital. Private equity firms often back incubators as a way of generating early-stage investment opportunities.

Jensen A- This quantifies the extent to which an investment has added value relative to a benchmark.

Kurtosis- Measures the flatness of the tails of a distribution curve. A flat-tailed distribution has an increased chance of large positive or negative realizations. This indicator give a good picture of the dramatic swings in some hedge funds.

Limited Partnership- This his how many hedge funds are structured. Which are business entities managed by one or more GP's who are liable for the funds debts and obligations.

Managed Futures- an investment strategy that uses listed financial and commodity futures markets and currency markets around the world. The managers are usually called CTA Commodity Trading Advisors.

Master-Feeder fund- This is a common hedge fund structure, which managers set up two separate vehicles one based in the U.S and offshore fund that is domiciled outside the U.S. Which serve as the only investors for third non U.S. fund. The goal is to create a single fund while taking investors form both the US and non-US countries.

Market Timing- Top-down investing strategies that shifts capital form one asset class to another depending on economic situations.

Mezzanine financing- This is the middle layer of financing in leverage buy-outs. This is usually a type of loan that sits between equity and secured debt.

Multi-Strategy- An investment style that uses many different strategies. This usually applies to Fund of Funds.

Portfolio- A private equity company will invest in several companies which is known as a portfolio company.

Private Placement Memorandum (PPM)- This refers to any type of offering of securities to any number of private accredited investors. It lays out all the details of an investment opportunity for the prospective client.

Prime Broker- A large bank or securities firm that give administrative and back office support to hedge funds and other professional investors.

Private Placement- This is when funds are sold without a public offering. This means that the fund is placed with a select number of private investors.

Ratchets- Is a structure that determines the plan of equity allocation between groups of shareholders. A ratchet allows a management teams to increase its share of equity in a company if the company is performing well.

R-Squared- Is a measure of the degree that a hedge funds returns are reflected to the overall financial market.

Redemption Fee- A charge used to stop people from withdrawals that a hedge-fund manger slaps against investors when they cash in their shares in the fund before an agreed date.

Short Only- An approach that relies on short sales of stock. The investor does not own the shares sold.

Seed capital- The provision of early stage capital to a company with a business venture or idea that has not been tested or established.

Sliding Fee Scale- An management fee that caries over the life of a partnership.

Term sheet- A summary sheet detailing conditions of investment opportunity.

Top-Down investing- A strategy that seeks to evaluate the influence of macro and micro-economics before buying individual investments.