Investment Strategies
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PrintAlpha: Alpha measures the returns in excess of the market/benchmark produced by a fund manager. It is that portion of a manager’s return that cannot be attributed to market movement.
Beta: Beta measures a fund's performance against a benchmark. A manager with a beta greater than 1.0 is more volatile than the market, while a manager with a beta less than 1.0 is less volatile than the market.
Closed fund: A hedge fund that has temporarily or permanently stopped accepting new capital from investors.
High Water Mark: The assurance that a fund only takes fees on profits unique to an individual investment. For example, a $1,000,000 investment is made in year 1 and the fund declines by 10%, leaving $900,000 in the fund. In year 2, the fund returns 11.11%(approx), bringing the investment value back to $1,000,000. If a fund has a high water mark, it will not take incentive fees on the return in year 2, since the investment has never grown. The fund will only take incentive fees if the investment grows above the initial level of $1,000,000.
Hurdle rate: The minimum investment return a fund must exceed before a performance allocation/incentive fee can be taken.
Incentive Fee: The fee on new profits earned by the fund for the period. For example, if the initial investment was $1,000,000 and the fund returned 25% during the period (creating profits of $250,000) and the fund has an incentive fee of 20%, then the fund receives 20% of the $250,000 in profits, or $50,000.
Leverage: Money borrowed to increase the amount of money invested to more than 100 % of the fund net asset value. Usually done to increase buying power and to increase exposure to an investment.
Lock up: To dissuade investors from allocating and redeeming frequently, many hedge funds require investors to stay invested for at anywhere from three months to 2 years.
Maximum Drawdown: The worst period of "peak to valley" performance for the fund, regardless of whether or not the drawdown consisted of consecutive months of negative performance.
Multi strategy: Investment style which allocates investment capital to a variety of investment strategies, although the fund is run by one management company.
NAV: Net asset value per share - the market value of a fund share. Equals the closing market value of all securities within a portfolio plus all other assets such as cash, subtracting all liabilities (including fees and expenses), then dividing the result by the total number of shares outstanding.
Net exposure: Net exposure measures how much a fund is exposed to market risk. For a long/short equity fund, if a fund is 100% long and 50% short, then the net exposure is 50%.
Prime broker: The principal brokerage for and investment fund. Prime brokers may provide custodial, clearing and research services, as well as supply the stocks a manager borrows to sell short.
Sharpe ratio: A measure of risk-adjusted return that signifies the amount of return for each unit of risk. It is calculated by subtracting the risk-free rate from the managers’ return and dividing by the standard deviation. The higher the Sharpe ratio the better the returns are on a risk-adjusted basis.
Short rebate: Managers who borrow stocks to sell short are responsible for the dividends those stocks would pay. Proceeds from short sales are typically invested in a Treasury-bill account, held with the prime broker as collateral. Depending on negotiations, much of the interest the Treasury-bill account generates is rebated to the manager.
Standard deviation: A statistical measurement of the variation of returns around a portfolio’s average return over a designated time period. Investors may examine historical standard deviation in conjunction with historical returns to decide whether a fund's volatility would have been acceptable given the returns it would have produced. A higher standard deviation indicates a wider dispersion of past returns and thus greater historical volatility. Standard deviation does not indicate how the fund actually performed but merely indicates the volatility of its returns over time.
Statistical arbitrage: Statistical arbitrage players use historical statistics to identify mis-pricings among securities that have some correlation among each other and try to benefit from market movements that close the gap.