Hedge Fund Glossary

Active Account
A brokerage account that makes many transactions. Some brokerage firms charge a fee to accounts that are less active. This is a way for brokerage firms to make money on accounts that otherwise would not generate revenues.

Alpha
Measures the value that an investment manager produces, by comparing the manager's performance to that of a risk-free investment (usually a Treasury bill). For example, if a fund had an alpha of 1.0 during a given month, it would have produced a return during that month that was one percentage point higher than the benchmark Treasury. Alpha can also be used as a measure of residual risk, relative to the market in which a fund participates.

Annual Rate Of Return
The compounded gain or loss in a fund's net asset value during a calendar year.

Arbitrage Investment Strategy
An approach that aims at exploiting price differentials that exist as a result of market inefficiencies. Arbitrage plays typically involve purchasing a security in one market, while selling an instrument with similar performance characteristics in another market -- earning returns that far exceed the risk incurred.

Automated Bond System (ABS)
An electronic system utilized by the New York Stock Exchange (NYSE) that monitors all bids on inactive bonds until the bids have been withdrawn or processed. Without this system, investors would have a difficult time receiving up-to-date information on inactive bonds.

Average Annual Return (Annualized Rate Of Return)
Cumulative gains and losses divided by the number of years of an investment's life, with compounding taken into account. The measure is used to compare returns on investments for periods ranging from partial to multiple years.

Average Monthly Return
Cumulative gains and losses divided by the number of months of the investment’s life, with compounding taken into account.

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.

Beginning Market Value (BMV)
The valuation at which the property should exchange at the date of origin, and the beginning of each period. The beginning market value at the start of every period is equal to the ending market value of the previous period.

Below Par Value
A term describing a bond whose price is below the face value or principal value, usually $1,000. As bond prices are quoted as a percentage of face value, a price below par would typically be anything less than 100.

Beta
Gauges the risk of a fund by measuring the volatility of its past returns in relation to the returns of a benchmark, such as the S&P 500 index. A fund with a beta of 0.7 has experienced gains and losses that are 70% of the benchmark's changes. A beta of 1.3 means the total return is likely to move up or down 30% more than the index. A fund with a 1.0 beta is expected to move in sync with the index.

Bid And Asked
Stockbroker's quotation where 'bid' refers to the highest price the buyer wants to pay, and 'asked' refers to the lowest price the seller will accept. The difference between the two prices is called a bid and asked spread, or just a spread. Though common to all trading in securities, this term is more prevalent in over-the-counter markets.

Bottom-Up Investment Strategy
An approach that seeks to identify investments that will produce strong returns, before assessing the influence that economic factor will have on those assets

Brokerage Fees
Fees charged by an agent, or agent's company to facilitate transactions between buyers and sellers. The brokerage fee is charged for services such as negotiations, sales, purchases, delivery or advice on the transaction.

Buy In
The purchase of a security to cover a previous sale of the same security. In case the seller is unable to deliver on the due date, the buyer can buy the security from some other seller and the original (defaulting) seller will have to make up the price difference. Also called buying-in.

Buy On Close
To buy at the end of the trading session at a price within the closing range.

Buy On Margin
Purchasing an asset by making a down payment (called the margin) and financing the balance amount through a loan by using the asset as the collateral (such as in a mortgage loan). In securities trading, only a down payment is required because the value of the securities themselves (which remain in the possession of the broker or seller) fully collateralizes the unpaid amount.

Buy Order
An order given to a broker or a bank authorizing the purchase of a specified amount of securities or commodities. Unless otherwise stipulated as to time, all orders are treated as day orders, good only on the day they are given. However, orders may also be placed with time limit parameters.

Capital Hurdle Rate
Minimum return on investment necessary to cover all costs associated with a project. If the expected rate of return is below the hurdle rate, the project is abandoned or is modified to increase the return. It must be equal to the incremental cost of capital and is also called break-even yield.

Closed Fund
A hedge fund or open-end mutual fund that has at least temporarily stopped accepting capital from investors, usually due to rapid asset growth. Not to be confused with a closed-end fund.

Closing Stock Price
The final price at which a security is traded on a given trading day. The closing price represents the most up-to-date valuation of a security until trading commences again on the next trading day.

Collateralized Mortgage Obligation (CMO)
A type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches. The repayments from the pool of pass-through securities are used to retire the bonds in the order specified by the bonds' prospectus.

Commercial Mortgage Backed Securities
An approach that seeks to exploit pricing differentials between various issues of mortgage-related bonds.

Compounded Monthly Return
The average monthly increase that, when compounding is taken into account, would have produced a fund's total return over any period of time. For example, if a fund had a one-year return of 20%, its compounded monthly return would be 1.53% -- the amount it would have needed to gain in each of 12 months to achieve that full-year result.

Convertible Arbitrage Investment Strategy
A conservative, market-neutral approach that aims to profit from pricing differences or inefficiencies between the values of convertible bonds and common stock issued by the same company. Managers of such funds generally purchase undervalued convertible bonds and short-sell the same issuers' stock. The approach typically involves a medium-term holding period and results in low volatility.

Convertible Security
Corporate bond or debenture (debt security) or preferred stock that may be exchanged for the common stock (equity security) of the issuing corporation in a certain proportion, within or after a specified period.

Credit Default Swap
A specific kind of counterparty agreement which allows the transfer of third party credit risk from one party to the other. One party in the swap is a lender and faces credit risk from a third party, and the counterparty in the credit default swap agrees to insure this risk in exchange of regular periodic payments (essentially an insurance premium). If the third party defaults, the party providing insurance will have to purchase from the insured party the defaulted asset. In turn, the insurer pays the insured the remaining interest on the debt, as well as the principal.

Currency
A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.

Current Stock Price
The last sale price prevailing in the market at a specific moment of time.

CUSIP Number
An identification number assigned to all stocks and registered bonds. The Committee on Uniform Securities Identification Procedures (CUSIP) oversees the entire CUSIP system.

CUSIP Service Bureau
The group that establishes and administers the nine-character numbering system used to identify registered U.S. and Canadian stocks, municipal bonds, and U.S. government securities by issuer and type. The CUSIP Service Bureau is operated by Standard & Poor’s.

Derivative
A financial instrument whose performance is linked to a specific security, index or financial instrument. Typically, derivatives are used to transfer risk or negotiate the future sale or delivery of an investment. Derivative instruments come in four basic forms: forward contracts, futures contracts, swaps and options.

Discount Stock Price
(1) The difference between the original offering price of a security and the price to which it may fall in the "after offering" market. (2) The amount by which a security sells below its face value (par value). A $1,000 par value bond selling at 95 (worth $950) would be selling at a $5 or 5% discount. The opposite of premium.

Discretionary Account
An account that allows a broker to buy and sell securities without the client's consent. The client must sign a discretionary disclosure with the broker as documentation of the clients consent. This is sometimes also referred to as a "managed account".

Distressed Securities Investment Strategy
Purchasing deeply discounted securities that were issued by troubled or bankrupts companies. Also, short-selling the stocks of those corporations. Such funds are usually able to achieve low correlations to the broader financial markets. The approach generally involves a medium- to long-term holding period.

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.

Emerging-Markets Investment Strategy
Investing in stocks or bonds issued by companies and government entities in developing countries, usually in Latin America, Eastern Europe, Africa and Asia. Such funds typically employ a short- to medium-term holding period and experience high volatility.

Event-Driven Investment Strategy
An approach that seeks to anticipate certain events, such as mergers or corporate restructurings. Such funds, which include risk-arbitrage vehicles and entities that buy distressed securities, typically employ medium-term holding periods and experience moderate volatility.

Ex-Dividend
A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be given ex-dividend status if a person has been confirmed by the company to receive the dividend payment.

Ex-Dividend Date
The date of the first day of a stock's ex-dividend period. If a stock is not owned by an investor prior to the ex-dividend date, then the investor will not be allowed to participate in receiving a dividend payout. Can also be referred to as the reinvestment date.

Execute An Order
To fulfill an order to buy or sell. When an execution is referred to as "good," it generally means that both the broker and the customer are satisfied that the price obtained is fair.

Fill Or Kill Order
A type of time-in-force designation used in securities trading that instructs a brokerage to execute a transaction immediately and completely or not at all. This type of order is most likely to be used by active traders and is usually for a large quantity of stock. The order must be filled in its entirety or canceled (killed). The purpose of a fill or kill order is to ensure that a position is entered at a desired price.

Fixed Income Investment Strategy
An approach in which the manager invests primarily in bonds, annuities or preferred stock. The investments can be long positions, short sales or both. Such funds are often highly leveraged.

Fixed-Income Arbitrage Investment Strategy
An approach that aims to profit from pricing differentials or inefficiencies by purchasing a bond, annuity or preferred stock and simultaneously selling short a related security. Such funds are often highly leveraged.

Floor Trader
An exchange member who executes transactions from the floor of the exchange exclusively for his or her own account.

Fund Net Asset Value
A fund's price per share or exchange-traded fund's (ETF) per-share value. In both cases, the per-share dollar amount of the fund is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding.

Fund Of Funds
An investment vehicle whose holdings consist of shares in hedge funds and private-equity funds. Some of these multi-manager vehicles limit their holdings to specific managers or investment strategies, while others are more diversified. Investors in funds of funds are willing to pay two sets of fees, one to the fund-of-funds manager and another set of (usually higher) fees to the managers of the underlying funds. This method is sometimes known as "multi-management".

Fund Prime Broker
A specific type of broker who typically only works in the area of large institutional clients in raising funds and helping out with specific compliance related needs.

Fund Transactions
All the activity of a portfolio: purchases and sales of securities, contributions to the fund and disbursements out of the fund, transfers, income receipts from dividends or bond interest, and payment of any administrative expenses. It is important with the case of hedge funds to read the fine print on what startup and operating expenses are paid out of the fees of the fund vs. absorbed by the fund.

Fundamental Analysis Investment Strategy
An approach that relies on valuing stocks by examining companies' financials and operations, including sales, earnings, growth potential, asset size and quality, indebtedness, management, products and competition.

Futures And Commodities Market
Commodities markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. The futures market is an auction market in which participants buy and sell future contracts for delivery on a specified future date. Trading is carried on through open yelling and hand signals in a trading pit.

General Partner
The individual or firm that organizes and manages a limited partnership, such as a hedge fund. The general partner assumes unlimited legal responsibility for the liabilities of a partnership.

Global-Macro Investment Strategy
An approach in which a fund manager seeks to anticipate broad trends in the worldwide economy. Based on those forecasts, the manager chooses investments from a wide variety of markets -- i.e. stocks, bonds, currencies & commodities. The approach typically involves a medium-term holding period and produces high volatility. Many of the largest hedge funds follow global-macro strategies. They are sometimes called "macro" or "global directional-investment" funds.

Hedge Fund
A private investment vehicle whose manager receives a significant portion of its compensation from incentive fees tied to the fund's performance -- typically 20% of annual gains over a certain hurdle rate, along with a management fee equal to 1% of assets. The funds, often organized as limited partnerships, typically invest on behalf of high-net-worth individuals and institutions. Their primary objective is often to preserve investors’ capital by taking positions whose returns are not closely correlated to those of the broader financial markets. Such vehicles may employ leverage, short sales, a variety of derivatives and other hedging techniques to reduce risk and increase returns. The classic hedge-fund concept, a long/short investment strategy sometimes referred to as the Jones Model, was developed by Alfred Winslow Jones in 1949.

Hedge Fund High Water Mark
The highest value that has been earned by an investment fund. This value is often used when determining the bonus earned by the fund manager; a fund manager's bonus will be based on the amount of money he or she earned above the high watermark level. If the amount of money earned is below the high watermark level, he or she will not receive a bonus.

Hedge Fund Redemption
After investing in hedge funds some accredited investors have a much harder time getting their money out of a hedge fund then into them. While this is often preventable it is usually the result of: ? Preset lockup periods where investors must keep their money in the fund for a minimum of 6 months to 3 years depending on the fund mandate but negotiable ? The liquidity of the asset classes the hedge fund deals with. Some hedge funds work in such illiquid markets that they will have redemption clauses in their contracts that allow them to wait 3-12 months for more liquid markets before being forced to sell a position. ? Arbitration. The process of going through arbitration and looking at which funds have been through it before can vary widely and be difficult. While a definite exception to the rule if you get invested with a rogue hedge fund manager you might have to chase them through arbitration or other legal means to redeem your initial investment. All of this lends to making sure you have your investment goals and expectations clearly defined so they can included in research a hedge fund consultant does for you and so you can just keep these extra thing in mind while doing research yourself. Many hedge funds do not have lockup periods of more than 3-6 months and the majority work in relatively liquid markets. As the Financial Times put it, "The salutary lesson for those wanting to invest directly in hedge funds is that, under the commonly used limited partnership framework, they are, in effect, going into business with a managing partner, not just investing."

Hedge Fund Strategies
There are some hedge fund strategies with over $50 or $100 billion dollars already being put to work while others are only employed by a small handful of firms. In 5-7 years there will be some new hedge fund strategies that will take hold and propel small emerging hedge fund managers into the world of $1B + hedge funds. Here is a list of 5 top hedge fund strategies that will explode in popularity over the next 5-7 years: ? 130/30 ? Carbon Credit Trading ? Socially Responsible & Green Hedge Funds ? Litigation Funding ? Intellectual Property (Patents, Domains and Licensing Rights)

High-Water Mark
A provision serving to ensure that a fund manager only collects incentive fees on the highest net asset value previously attained at the end of any prior fiscal year -- or gains representing actual profits for each investor. For example, if the value of an investor's contribution falls to, say, $750,000 from $1 million during the first year, and then rises to $1.25 million during the second year, the manager would only collect incentive fees from that investor on the $250,000 that represented actual profits in year-two.

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

Incentive Fee (Performance Fee)
The charge -- typically 20% -- that a fund manager assesses on gains earned during a given 12-month period. For example, if a fund posts a return that is 40% above its hurdle rate, the incentive fee would be 8% (20% of 40%) -- provided that the high-water mark does not come into play.

Inception Date
The day on which a fund starts trading.

Jensen's Alpha
A risk-adjusted performance measure that represents the average return on a portfolio over and above that predicted by the capital asset pricing model (CAPM), given the portfolio's beta and the average market return. This is the portfolio's alpha. In fact, the concept is sometimes referred to as "Jensen's measure."

Kurtosis
In probability theory and statistics, kurtosis (from the Greek word kurtos, meaning bulging) is a measure of the "peakedness" of the probability distribution of a real-valued random variable. Higher kurtosis means more of the variance is due to infrequent extreme deviations, as opposed to frequent modestly-sized deviations.

Lamp Letter
A May 6, 1997, "no-action letter" from the SEC to Lamp Technologies of Dallas indicating that an online hedge-fund database would not violate restrictions against marketing hedge funds. The landmark letter cleared the way for others to launch hedge-fund performance databases on the Internet, and expressed the SEC's opinion that such databases did not represent the type of general hedge-fund advertising that was prohibited under rule 502(c) of Regulation D under the Securities Act of 1933.

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 hopes that the returns on their positions will exceed their borrowing costs. The extent of a fund's leverage is stated either as a debt-to-equity 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 bring its total assets to $3 million, its leverage can be stated as "two times equity" or as 67% ($2 million divided by $3 million). Ratios of between two and five to one are common. Leverage can also come in the form of short sales, which involve borrowed securities.

Limited Partnership
Many hedge funds are structured as limited partnerships, which are business organizations managed by one or more general partners who are liable for the fund's debts and obligations. The investors in such a structure are limited partners who do not participate in day-to-day operations and are liable only to the extent of their investments.

Lock-Up
The period of time -- often one year -- during which hedge-fund investors are initially prohibited from redeeming their shares.

Long/Short Investment Strategy
An approach in which fund managers buy stocks whose prices they expect will increase and takes short positions in securities (usually in the same sector) whose prices they believes will decline. The strategy, also known as the Jones Model, is designed to generate profits during bullish periods in the overall stock market, while serving as a source of capital protection in a falling stock market.

Long-Biased Investment Strategy
An approach taken by fund managers who tend to hold considerably more long positions than short positions.

Macro Investing Strategy
An approach in which a fund manager seeks to anticipate broad trends in the worldwide economy. Based on those forecasts, the manager chooses investments from a wide variety of markets -- i.e. stocks, bonds, currencies & commodities. The approach typically involves a medium-term holding period and produces high volatility. Many of the largest hedge funds follow global-macro strategies. They are sometimes called "macro" or "global directional-investment" funds.

Managed Futures
A vehicle in which an investor gives a commodity trading advisor -- usually a manager or broker -- discretion or authority to buy and sell futures contracts, either unconditionally or with restrictions. A type of discretionary account.

Management Fee
The charge that a fund manager assesses to cover operating expenses. Investors are typically charged separately for costs incurred for outsourced services. The fee generally ranges from an annual 0.5% to 2% of an investor's entire holdings in the fund, and it is usually collected on a quarterly basis.

Market Timer
A hedge-fund manager that selects asset allocations in anticipation of movements in the broad market.

Market-Neutral Investment Strategy
An approach that aims to preserve capital through any of several methods and under any market conditions. The most common followers of the market-neutral strategy are funds pursuing a long/short investment strategy. These seek to exploit market discrepancies by purchasing undervalued securities and taking an equal, short position in a different and overvalued security. Market-neutral funds typically employ long-term holding periods and experience moderate volatility.

Master-Feeder Fund
A common hedge-fund structure through which a manager sets up two separate vehicles -- one based in the U.S. and an offshore fund that is domiciled outside the U.S. -- which serve as the only investors for a third non-U.S. fund. The two smaller entities are known as feeder funds, while the large offshore vehicle acts as the master fund. The purpose of such an arrangement is to create a single investment vehicle for both U.S. and non-U.S. investors.

Merger Arbitrage Investment Strategy
Trading the stocks of companies that have announced acquisitions or are the targets of acquisitions. Seeks to exploit deviations of market prices from proposed exchange formulas.

Mortgage-Backed Securities Arbitrage Investment Strategy
An approach that seeks to exploit pricing differentials between various issues of mortgage-related bonds.

Multi Strategy
An investment style that combines several different approaches. The term often applies to funds of funds.

National Association Of Securities Dealers (NASD)
The NASD was a self-regulatory organization of the securities industry responsible for the operation and regulation of the Nasdaq stock market and over-the-counter markets. It also administrated exams for investment professionals, such as the Series 7 exam. Merged with the NYSE Regulation, Inc. The merged with the NYSE Regulation Inc. in 2007 to form the organization now known as the Financial Industry Regulatory Authority (FINRA).

Negotiable Security
A stock or bond certificate or other evidence of debt, the title to which is freely transferable at delivery, e.g., coupon bonds, bankers acceptances.

Net Asset Value
A mutual fund's price per share or exchange-traded fund's per-share value. In both cases, the per-share dollar amount of the fund is derived by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding. In terms of corporate valuations, the value of assets less liabilities equals net asset value, or "book value".

Net Price
A final price after deducting all discounts and rebates.

Net Price Change
The difference between a day's last trade and the previous day's last trade.

Offshore Fund
An investment vehicle that is domiciled outside the U.S. and has no limit on the number of non-U.S. investors it can take on. Although the fund's securities transactions occur on U.S. exchanges and are executed by a U.S. manager, or general partner, its administration and audits are conducted offshore -- usually in a tax haven like the Cayman Islands. Because it is administered outside the U.S., non-U.S. investors and such U.S. investors as pension funds and other tax-exempt entities aren't subject to U.S. taxes.

Omega Ratio
For even given threshold or targeted return level (r) the Omega Ratio is the weighted gain/loss ratio relative to r. It uses all of the information in a return series instead of simple calculations of figures such as mean and variance.

Opening Price
The price at which a security first trades upon the opening of an exchange on a given trading day.

Opportunistic Investment Strategy
An approach that seeks to produce the greatest possible returns by making aggressive investments in the most-efficient products at a given time. Such funds typically hold their investments for five to 30 days, based on the momentum of the investments' values. They usually experience low volatility.

Paper Profits
A profit still existing in the security on paper, which has not yet been sold and therefore realized.

PIPEs
Acronym for private investments in public entities. Investments typically made by funds following Regulation D investment strategy.

Policy Effect
The measure of the returns between the portfolio which sticks to a set guideline of investing vs. a neutral market position.

Portable Alpha
A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index from which their beta is derived. Alpha is the return achieved over and above the return that results from the correlation between the portfolio and the market (beta). In simple terms, portable alpha is a strategy that involves investing in areas that have little to no correlation with the market.

Price Range
The lowest and highest prices that a given security reaches over a specified period, usually the previous 52 weeks.

Prime Broker
A large bank or securities firm that provides various administrative, back-office 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, record keeping, and investor reporting. A prime brokerage relationship doesn't preclude hedge funds from carrying out trades with other brokers, or even employing others as prime brokers. To compete for business, some prime brokers act as incubators for funds, providing office space and services to help new fund managers get off the ground.

Private Placement
The sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market.

Private-Equity Fund
Entities that buy illiquid stakes in privately held companies, sometimes by participating in leveraged buyouts. Like hedge funds, the vehicles are structured as private investment partnerships in which only qualified investors may participate. Such funds typically charge a management fee of 1.5% to 2.5%, as well as an incentive fee of 25% to 30%. Most private-equity funds employ lock-up periods of five to ten years, longer than those of hedge funds

Profit Taking
The act of selling stock, convertible securities, and/or bonds which have appreciated in value to translate a paper profit into a realized gain. Often used to explain the reason for a market decline after a noticeable run-up in prices.

Qualified Purchaser
To be a qualified purchaser you must meet either of the following criteria: a) Individuals who own $5 million in investments, which include securities, financial contracts entered into for investment purposes, cash, cash equivalents held for investment purposes, real estate held for investment purposes, CDs, bankers acceptances and other similar bank instruments held for investment purposes. Investments do not include real estate held for personal purposes, jewelry, art, antiques, and other collectibles. Debt used to acquire the investments is excluded from the value of the investments; b) Institutional investors who own $25 million in investments; c) A family owned company that owns $5 million in investments; d) For trusts with less than $25 million, a trust where the trustee and each person who contributes assets to the trust is a Qualified Purchaser; e) A "Qualified Institutional Buyer" under Rule 144A of the 33 Act, except that "dealers" under Rule 144 must meet the $25 million standard of the 1940 Act, rather than the $10 million standard of Rule 144A. Rule 144A generally defines a "Qualified Institutional Buyer" as institutions, including registered Investment Companies, that own and invest on a discretionary basis $100 million of securities that are affiliated with the institution, banks that own and invest on a discretionary basis $100 million in QIB securities and have an audited net worth of $25 million, and certain registered dealers; f) A company owned beneficially only by Qualified Purchasers; however, a company will not be deemed to be a qualified purchaser if it was formed for the specific purposes of acquiring the securities offered by a 3(c)(7) fund. For a complete definition of Qualified Purchaser, please see Title 15 U.S.C. Chapter 2D, Sub Chapter I, Section 80a-2(a)(51), which is publicly available at www.gpoaccess.gov/uscode/browse.html

Rate Of Return
The annual appreciation in the value of a fund or any other type of investment, stated as a percentage of the total amount invested. Sometimes referred to a simply the "return."

Real Time Share Prices
A stock or bond quote that states a security's most recent offer to sell or bid to buy. A delayed quote shows the same bid and ask prices 15 minutes and sometimes 20 minutes after a trade takes place.

Realized Gain
A gain resulting from selling an asset at a price higher than the original purchase price.

Rebalancing Worksheet
A worksheet containing the exchange trades needed to bring a portfolio's holdings into balance with the targets set for its assets.

Redemption Fee
A charge, intended to discourage withdrawals that a hedge-fund manager levies against investors when they cash in their shares in the fund before a specified date.

Regulation D (Reg D)
A provision in the Securities Act of 1933 that allows privately placed transactions to take place without SEC registration and prohibits hedge funds from advertising themselves to the general public. It also outlines which parties qualify as company insiders.

Regulation D Investment Strategy
An approach in which the fund manager provides financing to publicly traded companies, usually in exchange for a privately placed convertible note issued at a discount. Also known as PIPEs (private investments in public entities).

Rehypothecation
The pledging of securities in customer margin accounts as collateral for a brokerage's bank loan.

Relative-Value Investment Strategy
A market-neutral investment strategy that seeks to identify investments whose values are attractive, compared to similar securities, when risk, liquidity and return are taken into account.

Risk Arbitrage Investment Strategy
Purchasing stocks of companies that are likely takeover targets, while assuming short positions in the would-be acquiring companies. Risk arb players can employ an event-driven investment strategy or merger arbitrage investment strategy, seeking situations such as hostile takeovers, mergers and leveraged buyouts. Such funds typically experience moderate amounts of volatility.

Risk-Free Rate
The theoretical return on a risk-free investment, usually a U.S. security.

Round Lot
A unit of trading or a multiple of such. For stocks listed on the NYSE, 100 shares or a multiple of 100 shares. For bonds, particularly where institutions are concerned, 1,000 par value of a bond.

R-Squared
A measure of the degree to which a hedge fund's returns are correlated to the broader financial market. A figure of 1 would be a perfect correlation, while 0 would be no correlation and minus-1 would be a perfect inverse correlation. Any figure below 0.3 is considered non-correlated. The result is used to determine whether a hedge fund follows a market-neutral investment strategy. Sometimes referred to as "R."

Securities Dealer
(1) An individual or firm in the securities business acting as a principal rather than an agent. Typically, a dealer buys for his/her own account and sells to a customer from his/her own inventory. (2) An entity that stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price).

Security Downgrade
A negative change in the rating of a security. This situation occurs when analysts feel that the future prospects for the security have weakened from the original recommendation, usually due to a material and fundamental change in the company's operations, future outlook or industry.

Separate Management
Money gathered from one source that is managed in a distinct individual account. This is different from a pooled account and at times allows for customization for tax or personal interest purposes such as socially responsible investing.

Settlement Date
The date on which payment is made to settle a trade. For stocks traded on US exchanges, settlement is currently three or four business days after the trade. For mutual funds, settlement usually occurs in the US the day following the trade. In some regional markets, foreign shares may require months to settle.

Settlement Price
A price, based upon that day's closing price or range of closing prices, used in determining the next day's price limits, and in invoicing of deliveries to be made due to filing of notice of intention to deliver on that day.

Shares Spread
The difference between the bid price and the asked (offering) price. For example, when a stock is quoted "50 bid, offered at 52," a two-point spread is said to exist.

Sharpe Ratio
A measure of how 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 risk-free 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. Developed by Prof. William R. Sharpe of Stanford University.

Short Sale
Selling a security that the seller does not own but is committed to repurchasing eventually. It is used to capitalize on an expected decline in the security's price. Short selling is generally done by those hedging long positions or looking to profit from a decline in the value of a security.

Short-Biased Investment Strategy
An approach that relies on short sales. Such funds tend to hold larger short positions than long positions.

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. Those credits are accumulated through soft-dollar brokers, which channel trades to multiple securities brokers.

Sortino Ratio
Also called the "upside potential ratio." Similar to the Sharpe ratio, it was developed by the Pension Research Institute to determine the amount of "good" volatility that a fund's investment portfolio possesses -- that is, it seeks to define the amount by which the investment pool's value may increase, based on expected pricing fluctuations.

Sovereign Wealth Funds
Pools of money derived from a country's reserves, which are set aside for investment purposes that will benefit the country's economy and citizens. The funding for a sovereign wealth fund (SWF) comes from central bank reserves that accumulate as a result of budget and trade surpluses, and even from revenue generated from the exports of natural resources. The types of acceptable investments included in each SWF vary from country to country; countries with liquidity concerns limit investments to only very liquid public debt instruments.

Special Situations Investment Strategy
An event-driven investment strategy in which the manager seeks to take advantage of unique corporate situations that provides the potential for investment gains.

Specialist
A member of an exchange who acts as the market maker to facilitate the trading of a given stock. The specialist holds an inventory of the stock, posts the bid and ask prices, manages limit orders and executes trades. Specialists are also responsible for managing large movements by trading out of their own inventory. If there is a large shift in demand on the buy or sell side, the specialist will step in and sell out of their inventory to meet the demand until the gap has been narrowed.

Standard Deviation
For an investment portfolio, it measures the variation of returns around the portfolios mean-average return. In other words, it expresses an investment's historical volatility. The further the variation from the average return, the higher the standard deviation.

Statistical Arbitrage Investment Strategy
A market-neutral investment strategy that seeks to simultaneously profit and limit risk by exploiting pricing inefficiencies identified by mathematical models. The strategy often involves short-term bets that prices will trend toward their historical norms.

Stock Churning
Excessive trading of a client's account in order to increase the broker's commissions.

Stock Exchange Seat
A traditional figure-of-speech for membership on an exchange. Many exchanges are now moving to mostly or 100% electronic trading platforms and are doing away with traditional floor seats which have been around since the dawning of exchanges.

Stock Liquidation
Any transaction that offsets or closes out a long or short position. Liquidity and liquidation are very important factors to consider while analyzing investments made by hedge funds.

Stock Price Range
The high and low prices, or bids and offers, recorded during the period designated as the official close. Also known as the range.

Stock Settlement
An arrangement between brokerage houses for the payment or receipt of cash or securities. It represents the final consummation of a securities transaction and is handled through the stock clearing corporation.

Stock Trading Volume
The aggregate number of shares traded during a given period. In addition, stock trading volume refers to the daily number of shares of a security that change hands between a buyer and a seller.

The Close
The period at the end of the trading session. In addition, the close is the closing price of a security.

The Opening Bell
The period at the beginning of a trading session officially designated by the exchange during which all transactions are considered made "at the opening." A bell rings to signify the day's start of trading on a securities exchange.

Top-Down Investment Strategy
An approach that seeks to assess the influence of various macro-and micro-economic factors before identifying individual investments.

Trade Date
The date on which a trade occurs. Trades generally settle (are paid for) 1-5 business days after a trade date. With stocks, settlement is generally 5 business days after the trade.

Trading
Buying and selling securities or commodities on a short-term basis, hoping to make quick profits.

Trading Floor
The floor where trading activities are conducted. Trading floors are found in the buildings of various exchanges, such as the New York Stock Exchange and the Chicago Board of Trade. These floors represent the area where traders complete the buying or selling of an asset.

Trading Halt
A temporary suspension in the trading of a particular security on one or more exchanges, usually in anticipation of a news announcement or to correct an order imbalance. A trading halt may also be imposed for purely regulatory reasons. During a trading halt, open orders may be canceled and options may be exercised.

Trading Range
The difference between the high and low prices traded during a period of time.

Treynor Ratio
A measure of the excess return per unit or risk, where the excess return is defined as the difference between the portfolio's return and the risk-free rate of return over the same period.

Underlying Security
The security subject to being purchased or sold upon exercise of an option contract. For example, IBM stock is the underlying security to IBM options.

Value Investment Strategy
An approach that involves purchases of stocks that the manager deems to be priced below their intrinsic values, or are out of favor with the market but are still fundamentally solid. Such funds typically employ long-term holding periods and experience low volatility.

Venture Capital
Money given to corporate start-ups and other new high-risk enterprises by investors who seek above-average returns and are willing to take illiquid positions.

VIX
Market Volatility Index. An index designed to track market volatility as an independent entity. The Market Volatility Index is calculated based on option activity and is used as an indicator of investor sentiment, with high values implying pessimism and low values implying optimism.

Volatility
The likelihood that an instrument's value will change over a given period of time, usually measured as beta.

Warrant
A certificate giving the holder the right to purchase shares of stock at a stipulated price within a specified time span. Warrants are like call options, but with much longer time spans -- sometimes years or even forever. They are often attached to other securities (such as bonds) as an added purchase inducement or "sweetener" to enhance marketability. After issuance, a warrant may be traded separately, the price of which reflects the value of the underlying stock.

Warrant Arbitrage
Developed as a result of the experience gained whilst working and trading on the Japanese Warrants desk and having fine-tuned the software for the Japanese market, other markets, in particular the European markets, have been incorporated. The application combines a blend of traditional option pricing calculators together with practical fine tuning to identify warrant price anomalies on a volatility basis, or where warrant prices have broken their historic relationships with the underlying stock price. At the heart of the system is empirical regression and volatility crossover analysis, providing real-time pricing and graphical capabilities to view particular issues, or the market by sector, maturity, SE or a combination (SE = stock price / exercise price). Other features include interactive Premium/SE and Implied Volatility/Historic Volatility graphics, what-if-scenarios and a variety of reports to track the warrant universe. Whilst the basis for creative warrant trading strategies, the system can dramatically enhance client comfort levels with graphical awareness of optimal warrant/stock purchases and by confirming fundamentals.

Wire House
A firm operating a private wire to its own branch offices or to other firms, commission houses or brokerage houses. Many times the largest banks on wall street are casually referred to as wirehouses.

Zero-Coupon Bond
A zero-coupon bond (also known as a discount bond) is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity. It does not make periodic interest payments, or so-called "coupons," hence the term zero-coupon bond. Investors earn interest via the difference between the discounted price of the bond and its par (or redemption) value. Examples of zero-coupon bonds include U.S. Treasury bills, U.S. savings bonds, and long-term zero-coupon bonds. In contrast, an investor who has a regular bond receives income from coupon payments, which are usually made semi-annually. The investor also receives the principal or face value of the investment when the bond matures.