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Alpha
A term used to measure risk adjusted returns produced by hedge fund managers. The alpha is determined by comparing the performance of the hedge fund manager to the value of a risk free investment.
Annual rate of return
The upward and downward movement in the net asset value of a given fund during a calendar year.
Arbitrage theories/strategies
A type of investment strategy which seeks to exploit the differences in prices which occur as a result of market inefficiencies. Often such an approach involves buying a security while selling another which has a similar performance record. The profit lies in skimming the pricing difference between the two securities at very low risk.
Annual return
The accumulated returns of a given investments divided by the number of years during which the investment has been active.
Beta
The measurement of overall fund risk calculated by measuring the volatility of a hedge fund's past returns in comparison to the returns of a benchmark such as the CSFB Hedgefund Index. An example: A fund with a beta of 1 moves in synch with the benchmark. A fund with a beta of 0.2 has experienced gains and losses which amount to 20% of the benchmark's changes. If the fund's beta is 1,6, the return is likely to move up or down 60% more than the index.
Convertible arbitrage investment strategy
This approach is aiming to generate profits from differences between the values of convertible bonds and ordinary stock issued by the same company.
Derivative
A financial instrument, the value of which depends on an underlying asset. Examples of derivatives are options and futures.
Event driven investment strategy
An investment strategy which is dependent on certain events occurring, for instance mergers or corporate restructurings. These types of hedge funds are often risk-arbitrage entities or they buy distressed securities. They have medium term holding periods and experience moderate volatility.
Fixed income investment strategies
The managers of hedge funds which employ a fixed income investment strategy invest mostly in bonds, annuities or preferred stock. These investments can be both long and short positions. These types of funds are often highly leveraged.
Fund of funds
A fund of funds is basically speaking a hedge fund which invests in other hedge funds or private equity funds. They are multi-manager vehicles which sometimes confine their holdings to specific managers or investment strategies, other times they diversify. Be aware that investment into fund of funds demand payment of two sets of fees, one fee to the FOF manager and another, typically higher than the first, to the managers of the underlying single hedge funds.
Managed futures
A vehicle where an investor gives a commodity trading advisor (manager or broker) discretion or authority to buy and sell futures contracts either with or without certain conditions attached.
Multi strategy
An investment style that combines several different strategies. Most often, it is fund of funds who employ this strategy type.
PIPEs
An acronym for Private Investments in Public Equity. The PIPE deal entails a pre-negotiated, direct investment in a public company. In exchange for the investment, the investor typically receives stock or debt financing which are convertible into equity with a fixed or floating discount attached.
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Glossary