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Financial Terms Glossary

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Glossary of financial terms

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Actively Managed Hedged Funds

These can be invested into equities, fixed interest and money market instruments.The fund managers can speculate in the derivatives market and / or employ hedging techniques, utilizing various option contracts.


Alpha is the measure of a fund’s average performance independent of the market, (i.e. if the market return was zero.) In a Regression of fund excess returns versus benchmark excess returns, Alpha measures the consistent element (positive or negative) of fund excess returns not related to the benchmark or random factors. For example, if a fund has an alpha of 2.0, and the market return was 0% for a given month, then the fund would, on average, return2% for the month.

Alternative Assets

Includes private real estate, public real estate, venture capital, non-venture private equity, hedge funds, distressed securities, oil and gas partnerships, event arbitrage, general arbitrage, managed funds, commodities, timber and other.

American Stock Exchange - AMEX

The second-largest stock exchange in the U.S., after the New York Stock Exchange (NYSE). In general, the listing rules are a little more lenient than those of the NYSE, and thus the AMEX has a larger representation of stocks and bonds issued by smaller companies than the NYSE. Some index options and interest rate options trading also occurs on the AMEX. The AMEX started as an alternative to the NYSE. It originated when brokers began meeting on the curb outside the NYSE in order to trade stocks that failed to meet the Big Board‘s stringent listing requirements, but the AMEX now has its own trading floor. In 1998 the parent company of the NASDAQ purchased the AMEX and combined their markets, although the two continue to operate separately. also called The Curb.

Annual Compound Return

The annual compound (ACR) return is the return that if compounded over the life of the fund would lead to the total return of the fund. For example, if a fund has a 10 year total return equaling 100%, the annual compound return would be 7.18%.

Annual Percentage Rate (APR)

The APR is designed to measure the "true cost of a loan". The aim is to create a level playing field for lenders preventing them from advertising a low rate and hiding fees. In the case of a mortgage the APR should reflect the yearly cost of a mortgage, including interest, mortgage insurance, and the origination fee, expressed as a percentage.

Annual Rate of Return

There are several ways of calculating this. The most commonly used methodologies reflect the compounding effect of each period‘s increase or decrease from the previous period.


A financial transaction or strategy that seeks to profit from a price differential perceived with respect to related or correlated instruments in different markets and typically involves the simultaneous purchase of an instrument in one market and the sale of the same or related instrument in another market.


An asset is anything that is considered as having a positive monetary value. Assets include holdings of obvious market value (cash, equities, property), harder-to-measure value (equipment & stock), and other quantities (pre-paid expenses, goodwill) considered assets by accounting conventions but possibly having no market value at all.

Asset Allocation

This is the process of selecting a mixture of different asset classes - equities, bonds and cash investments to achieve an investment objective. It is a critical part of investing. A wise asset allocation strategy is the difference between a structured investment approach and a simple collection of investments.

Average Annual Return or Average Rolling 12 Month Return

The average of the rolling 12 month performance periods i.e. If a fund launches in January 1997, and it is currently March 1998, then there are four rolling 12 month periods for the fund. (The first is January 1997-December 1997, the next is February 1997-January 1998, the next is March 1997-February 1998, and the last is April 1997 - March 1998.). The average annual return is the average of the four rolling 12 month periods.

Average Gain

The average of all profitable months in a given period. The Average Gain is used as the numerator when calculating the Relative strength Index.

Average Loss

The average of all negative months in a given period. The Average Loss is used as the denominator when calculating Relative Strength Index.

Average Return

The average of all the monthly performance returns in a given period. Average Return is commonly used as a component in some Risk/Return measures.

Average Number of Positions

The number of securities that a fund holds on any given day.

Average Portfolio Turnover

The percentage of a portfolio that is bought and sold each year.

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Balanced funds

These invest in a mix of equities and bonds & cash. In general balanced funds provide a reasonable level of income with the scope for an increase in both the capital and the income.

Basis Point

A basis point is one one-hundredth of a percent i.e. 50 basis points or "bps" is 0.5%.

Bear / Bear Market

Bear is a term describing an investor who thinks that a market will decline. The term also refers to a short position held by a market maker. A Bear Market is a market where prices are falling over an extended period.


A stock or bond that is widely believed to be an indicator of the overall market's condition. Also known as Barometer stock.


A fund‘s benchmark should be a reasonable proxy for the investment universe available to the fund manager. Total return indices are preferable as are those that use a suitably weighted index of the universe of assets from which the fund manager can select. In practice an index exactly reflecting the fund asset universe may not be available in which case the benchmark should be a close proxy.


Beta is the measure of a fund's volatility relative to the market. In a Regression Analysis Beta is the slope of the regression line. In a regression of fund versus benchmark excess returns Beta measures the tendency of the fund excess returns to move in line with the benchmark. A beta of greater than 1.0 indicates that the fund is more volatile than the market, and less than 1.0 is less volatile than the market. For example, if the market rises 1% and a fund has a beta greater than 2.5, the fund will rise, on average, 2.5%. For a fund with a beta of 0.4, if the market rises 1%, the fund will rise on average, 0.4%. The relationship is the same in a falling market. (Please note that funds can have a negative beta, meaning that on average they rise when the market falls and vice versa).

Bid Price

The price at which investors sell their units back to the manager

Blue Chips

Large, continuously well performing stock, presumed to be among the safer investments on an exchange.


A debt investment, with which the investor loans money to an entity (company or government) that borrows the funds for a defined period of time at a specified interest rate. The indebted entity issues investors a certificate, or bond, that states the interest rate (coupon rate) that will be paid and when the loaned funds are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually).

Bond funds

These hold only bonds and cash. As with equity funds, they can be designed to purchase particular grades of bonds. When considering investing in a bond fund an investor should pay particular attention to the investment grade and the duration of the holdings of the fund.

Bottom up Investing

An approach to investing which seeks to identify well performing individual securities before considering the impact of economic trends.

Bull / Bull Market

An investor who believes that the market is likely to rise. A Bull Market is a market where prices are rising over an extended period.

Bulldog Bond

A sterling denominated bond that is issued in London by a company that is not British. These sterling bonds are referred to as bulldog bonds as the bulldog is a national symbol of England.

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Call Option

An option giving the holder the right, but not the obligation, to buy a specific quantity of an asset for a fixed price during a specific period.

Calmar Ratio

A return/risk ratio. Return (numerator) is defined as the Compound Annualized Rate of Return over the last 3 years. Risk (denominator) is defined as the Maximum Draw down over the last 3 years.


A contract that protects the holder from a rise in interest rates or some other underlying security beyond a certain point.

Capital Asset Pricing Model (CAPM)

This is a method suitable for the management of diversified portfolios where the only risk is systematic risk.

Closed-end Fund

Type of fund that has a fixed number of shares or units. Unlike open-ended mutual funds, closed-end funds do not stand ready to issue and redeem shares on a continuous basis.


A contract that protects the holder from a rise or fall in interest rates or some other underlying security above or below certain fixed points. The contract offers the investor protection from interest rate moves outside of an expected range.

Components of Risk

A fund‘s total risk, where risk is measured by volatility, can be analyzed into two components, called specific and non-specific risk. The non-specific risk is the benchmark-correlated component and is typically measured by Beta.

Consumer Discretionary Sector

The array of businesses included in the Consumer Discretionary Sector are categorized into five industry groups. They are: Automobiles and Components; Consumer Durables and Apparel; Hotels, Restaurants and Leisure; Media; and Retailing.

Consumer Staples

The industries that manufacture and sell food/beverages, tobacco, prescription drugs, and household products. Proctor and Gamble would be considered a consumer staple company because many of its products are household and food related.

Convertible Arbitrage

This is an investment strategy that involves taking a long position on a convertible security and a short position in its converting common stock. This strategy attempts to exploit profits when there is a pricing error made in the conversion factor of the convertible security.

Convertible Bond

A bond that can be exchanged, at the option of the holder, for a specific number of shares of the company's preferred stock or common stock. Convertibility affects the performance of the bond in certain ways. First and foremost, convertible bonds tend to have lower interest rates than non-convertibles because they also accrue value as the price of the underlying stock rises. In this way, convertible bonds offer some of the benefits of both stocks and bonds. Convertibles earn interest even when the stock is trading down or sideways, but when the stock prices rise, the value of the convertible increases. Therefore, convertibles can offer protection against a decline in stock price. Because they are sold at a premium over the price of the stock, convertibles should be expected to earn that premium back in the first three or four years after purchase.

Corporate Bonds

These are bonds issued by companies. The amount of interest they pay, the coupon rate, is generally higher than bonds of similar duration issued by the government because the risk of default is higher. Independent companies such as Standard & Poor‘s and Moody‘s issue credit ratings for Corporate Bonds to allow investors to have a clearer perception of quality.


This is a measure of the extent to which a change in one variable tends to correspond to a change in another. Correlation is measured on a scale from +1 to –1. A correlation of +1 represent perfect unison, with up and down movements synchronized and in proportion. Correlation of zero represents complete independence, with up and down movements of one variable having no relation to those of the other. Correlation of –1 represents perfect unison but this time with the two moving in the opposite direction.


Denotes the rate of interest on a fixed interest security. A 10 per cent coupon pays interest of 10 per cent a year on the nominal value of the stock.

Cyclical Stock

The stock of a company which is sensitive to business cycles and whose performance is strongly tied to the overall economy. Cyclical companies tend to make products or provide services that are in lower demand during downturns in the economy and higher demand during upswings. Examples include the automobile, steel, and housing industries. The stock price of a cyclical company will often rise just before an economic upturn begins, and fall just before a downturn begins. Investors in cyclical stocks try to make the largest gains by buying the stock at the bottom of a business cycle, just before a turnaround begins. Opposite of defensive stock.

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- A loan raised by a company, paying a fixed rate of interest and secured on the assets of the company.

Defensive Stock

A stock that tends to remain stable under difficult economic conditions. Defensive stocks include food, tobacco, oil, and utilities. These stocks hold up in hard times because demand does not decrease as dramatically as it may in other sectors. Defensive stocks tend to lag behind the rest of the market during economic expansion because demand does not increase as dramatically in an upswing.


The rate at which the price of an option changes in response to a move in the price of the underlying security. If an option‘s delta is 0.5 (out of a maximum of 1), a $2 move in the price of the underlying will produce a $1 move in the option.

Delta Hedge

A hedging position that causes a portfolio to be delta neutral.


Financial contracts whose value is tied to an underlying asset. Derivatives include futures and options.


When a security is selling below its normal market price, opposite of premium.

Distressed Securities

A distressed security is a security of a company which is currently in default, bankruptcy, financial distress or a turnaround situation.

Distributor status

An offshore fund which pays out most of its net income to investors (at least 85% after charges and other expenses). Funds whose gross income is minimal (less than 1% of assets) are also granted distributor status. Any gain made on the sale of the investment will be subject to the normal Capital Gains Tax rules. The fund must have held distributor status for the full term of the investment to obtain this tax treatment.


A well-diversified portfolio will have assets placed in investment classes that cover a wide range of the risk/return spectrum. Examples of some investment vehicles include equities, bonds, mutual funds (which can comprise equities, bonds, or a combination of both), certificates of deposit (CDs), savings, and money market accounts. Each investment class tends to react differently to changes in financial markets and to the economy as a whole. Thus, by diversifying your portfolio, risk is spread over a broader range of investments, potentially minimizing the impact of downturns in the economy or a particular market sector.


The place where funds are registered.

Downside Deviation

This is a measure of the deviation of fund or benchmark returns that fall below the Minimum Acceptable Return (MAR). It is calculated by taking root mean square of the negative differences. Downside Deviation is an alternative measure of risk that focuses on the downside only. Semi-variance is a special case of Downside Deviation where MAR for each period is the risk-free rate of return plus the mean excess return.


An investor that promotes the maintenance of low interest rates . Their premise is that inflation and its negative effects upon society are minimal. Doves prefer low interest rates as a means of igniting growth within the economy. They believe the negative effects are negligible in the larger scheme of things.

Draw down

The percentage loss in value of a fund or benchmark from previous high point.

Due Diligence

The process of evaluating the soundness of an investment.

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A description of the trade-off between risk & return. There are a number of different rations used to describe efficiency including Sharpe ratio, Treynor Ratio, Jensen Alpha, Risk adjusted performance (RAP), M-squared, Information ratio and Sortino ratio. Each of these ratios seeks to provide a measure of return-per-unit-of-risk.

Efficiency chart

A chart which plots mean return versus risk. Points can be plotted on the chart for one or more funds, the benchmark & the risk-free rate. The Efficiency line is a straight line drawn through the risk-free and benchmark points. The main difference between different types of Efficiency chart is the risk measure used.

Efficient Frontier

If you have data for a collection of funds and you graph the return rates and standard deviations for these funds, and for all portfolios you can get by allocating among them. Markowitz showed that you get a region bounded by an upward-sloping curve, which he called the efficient frontier. Any point on this line has the optimum return for a given level of risk.

EFTA – European Fair Trade Association

A network of 11 Fair Trade organisations in nine European countries which import Fair Trade products from some 400 economically disadvantaged producer groups in Africa, Asia and Latin America. EFTA's members are based in Austria, Belgium, France, Germany, Italy, the Netherlands, Spain, Switzerland and the United Kingdom.

Emerging Markets

Typically includes markets within countries that have an underdeveloped or developing infrastructure with significant potential for economic growth and increased capital market participation for foreign investors. These countries generally possess some of the following characteristics; per capita GNP less than $9000, recent economic liberalisation, debt ratings below investment grade, recent liberalisation of the political system and non membership of the Organisation of Economic Cooperation and Development. Because many emerging countries do not allow short selling or offer viable futures or other derivatives products with which to hedge, emerging market investing entails investing in geographic regions that have underdeveloped capital markets and exhibit high growth rates and high rates of inflation. Investing in emerging markets can be very volatile and may also involve currency risk, political risk and liquidity risk. Generally a long-only investment strategy.

Emerging Markets Debt

Debt instruments of emerging market countries. Most bonds are US Dollar denominated and a majority of secondary market trading is in Brady bonds.


The term for company shares The share capital forms the basis of the equity of the company. These are ownership positions in companies that can be traded in public markets. Often produce current income, which is paid in the form of quarterly dividends. In the event of the company going bankrupt equity holders‘ claims are subordinate to the claims of preferred stockholders and bondholders.

Equity funds

These funds buy equities. Their investment objective is usually specific to a certain equity type -- small cap, large cap, international, etc. In general they will have more than 80% of their assets invested in equities.

Equity Hedge

Also known as long / short equity, combines core long holdings of equities with short sales of stock or stock index options. Equity hedge portfolios may be anywhere from net long to net short depending on market conditions. Equity hedge managers generally increase net long exposure in bull markets and decrease net long exposure or are even net short in a bear market.

Equity Market Neutral

This investment strategy is designed to exploit equity market inefficiencies and usually involves being simultaneously long and short equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta or currency neutral or both. Attempts are often made to control industry, sector and market capitalisation exposures.

Equity Risk

The risk of owning stock or having some other form of ownership interest.

Ethical Investing

Choosing to invest in companies that operate ethically, provide social benefits, and are sensitive to the environment. Also called socially conscious investing.

EU - European Union

The economic association of over a dozen European countries which seek to create a unified, barrier-free market for products and services throughout the continent. The majority of countries share a common currency with a unified authority over that currency. Notable exceptions to the common currency are the UK, Sweden, Norway, Denmark.


A bond issued and traded outside the country whose currency it is denominated in, and outside the regulations of a single country; usually a bond issued by a non-European company for sale in Europe. Interest is paid gross.

Eurozone or Euroland

The collective group of countries which use the Euro as their common currency.

Event Driven Investing

Investment strategy seeking to identify and exploit pricing inefficiencies that have been caused by some sort of corporate event such as a merger, spin-off, distressed situation or recapitalisation.

Excess Return

The return in excess of the risk free return. Note that the risk-free rate of return is not a constant but changes each period.

Exit Fee

A fee paid to redeem an investment. It is a charge levied for cashing in a fund‘s capital.


The condition of being subjected to a source of risk.

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FCP- Fonds Commun de Placement

FCPs are a common fund structure in Luxembourg. In contrast to SICAV, they are not companies, but are organised as co-ownerships and must be managed by a fund management company.

Feeder Fund

A fund which invests only in another fund. The feeder fund may be a different currency to the main fund and may be used to channel cash in to the main fund for a different currency class.

Fixed Income Arbitrage

Investment strategy that seeks to exploit pricing inefficiencies in fixed income securities and their derivative instruments. Typical investment is long a fixed income security or related instrument that is perceived to be undervalued and short a similar related fixed income security or related instrument. Often highly leveraged.

Floating Rate

Any interest rate that changes on a periodic basis. The change is usually tied to movement of an outside indicator, such as the Bank of England Base Rate. Movement above or below certain levels is often prevented by a predetermined floor and ceiling for a given rate. For example, you might see a rate set at "base plus 2%". This means that the rate on the loan will always be 2% higher than the base rate, which changes regularly to take into account changes in the inflation rate. For an individual taking out a loan when rates are low, a fixed rate loan would allow him or her to "lock in" the low rates and not be concerned with fluctuations. On the other hand, if interest rates were historically high at the time of the loan, he or she would benefit from a floating rate loan, because as the prime rate fell to historically normal levels, the rate on the loan would decrease. Also called adjustable rate.


A contract that protects the holder against a decline in interest rates or prices below a certain point.


An agreement to execute a transaction at some time in the future. In the foreign exchange market this is a tailor made deal where an investor agrees to buy or sell an amount of currency at a given date.

Forward Rate Agreement (FRA)

A type of forward contract that is linked to interest rates.

FTSE 100 - The Financial Times Stock Exchange 100 stock index

A market cap weighted index of stocks traded on the London Stock Exchange. Similar to the S&P 500 in the United States.

Fund of Funds

An investment vehicle that invests in more than one fund. Portfolio will typically diversify across a variety of investment managers, investment strategies and subcategories. Provides investors with access to managers with higher minimums than individuals might otherwise afford.

Funds under Management

Total amount of funds managed by an entity, excluding leverage.

Futures Markets

Commodity exchanges where futures contracts are traded. Different exchanges specialise in particular kinds of contracts. Major exchanges include the Commodity Exchange, the New York Mercantile Exchange, the Chicago Board of Trade and the Chicago Mercantile Exchange.

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The effect that borrowing has on the equity capital of a company or the asset value of a fund. If the assets bought with funds borrowed appreciate in value, the excess of value over funds borrowed will accrue to the shareholder, thus augmenting, or gearing up the value of their investment.

Geographic Spread

The distribution in a fund‘s portfolio over different parts of the world, either by countries or larger areas.

Gilt-Edged Securities

Stocks and shares issued and guaranteed by the British government to raise funds and traded on the Stock Exchange. A relatively risk-free investment, gilts bear fixed interest and are usually redeemable on a specified date. The term is now used generally to describe securities of the highest value. According to the redemption date, gilts are described as short (up to five years), medium, or long (15 years or more).

Global Macro

The investment strategy is based on shifts in global economies. Derivatives are often used to speculate on currency and interest rate movements.

GNMA (Ginnie Mae) - Government National Mortgage Association

A U.S. Government-owned agency which buys mortgages from lending institutions, securities them, and then sells them to investors. Because the payments to investors are guaranteed by the full faith and credit of the U.S. Government, they return slightly less interest than other mortgage-backed securities.

Growth Manager

A growth manager buys stocks whose growth rates in sales have been, or are expected to be, greater than most companies. New technology, a proprietary product or being well positioned within a growth industry, can all contribute to a company's accelerated growth rate. Growth portfolios generally contain stocks whose earnings growth and return on equity are greater than the FT All Share.

Growth Stocks

Stock of a company which is growing earnings and/or revenue faster than its industry or the overall market. Such companies usually pay little or no dividends , preferring to use the income instead to finance further expansion.

Growth Orientated Portfolios

Dominant theme is growth in revenues, earnings and market share. Many of these portfolios are hedged to mitigate against declines in the overall market.

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An investor who has a negative view towards inflation and its effects on markets. Hawkish investors prefer higher interest rates in order to maintain reduced inflation.


Any transaction with the objective of limiting exposure to risk such as changes in exchange rates or prices.

Hedge Funds

Hedge funds are eclectic investment pools, typically organized as private partnerships and often located offshore for tax and regulatory reasons. Their managers--who are paid on a fee-for-performance basis. They are free to use a variety of investment techniques, including short positions and gearing, to raise returns and cushion risk. Three main classes of hedge funds can be identified:

  • macro funds, which take large directional (unhedged) positions in national markets based on top-down analysis of macroeconomic and financial conditions, including the current account, the inflation rate, and the real exchange rate;
  • global funds, which also take positions worldwide, but employ bottom-up analysis, picking stocks on the basis of individual companies' prospects; and
  • relative value funds, which take bets on the relative prices of closely related securities (treasury bills and bonds, for example).

Within these categories, there is further diversity. Although most macro hedge funds take positions mainly in mature markets, some also take positions in emerging markets. A number of the largest macro funds do both and spread their holdings across equities, bonds, and currencies (taking both short and long positions), and in addition hold commodities and other less liquid assets such as real estate. But the majority of macro funds hold a more limited range of assets, typically allocating only a fraction of their portfolios to emerging markets, where risks of concentrated stakes and costs of establishing and liquidating large positions can be high. Most relative value funds similarly limit their holdings to the mature markets, because their expertise is limited to those markets.


Hedge fund managers while taking a position may encourage other investors to follow this trend.

High Water Mark

Used to mark a point above which performance related fees are paid to an investment manager. Use of High Water Marks has become standard in the Hedge Fund industry. High water marks are not mandatory.

High-Yield Bond

Often called junk bonds, these are low grade fixed income securities of companies that show significant upside potential. The bond has to pay a high yield due to significant credit risk.

Highest 12 Month Return

The best or highest 12 month period of a fund‘s performance.

Highest Monthly Return

The best or highest monthly return of the fund. The best or highest monthly return of the fund.

High Yield Debt Market Risk.

The market for high yield debt depends on the above-average risk that a company rated non-investment grade will not be able to serve its debt obligations in a timely manner. High yield bonds therefore expose investors to a higher probability of default than other fixed income instruments.

Holding Period Return

The return for a stated period for which an investment is held. The Holding Period Return = (sale price + dividends or interest - purchase price) / purchase price.

Hurdle Rate

The return above which a hedge fund manager begins taking incentive fees. For example, if a fund has a hurdle rate of 10%, and the fund returns 25% for the year, the fund will only take incentive fees on the 15% return above the hurdle rate.

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Incentive Fee

The fee on new profits earned by a fund for a period. For example, if an initial investment of £1,000,000 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 3250,000 in profits, or £50,000.


An arithmetic mean of selected stocks intended to represent the behaviour of the market or some component of it. One example is the FTSE 100 which adds the current prices of the one hundred FTSE 100 stocks and divides the results by a pre-determined number, the divisor.

Index Funds

A fund that attempts to achieve a performance similar to that stated in an index. The purpose of this fund is to realise an investment return at least equal to the broad market covered by the indices while reducing management costs.

Index Linked Gilt

A gilt, the interest and capital of which change in line with the Retail Price Index.

Index Tracker

A fund whose aim is to track a specified benchmark. There are various tracking techniques including replication, stratification, optimisation and derivative-based strategies.

Information Ratio

The Information Ratio for a fund relative to a benchmark is it‘s Alpha divided by it’s Tracking Error.

In the Money

A condition where an option has a positive intrinsic value. Intrinsic Value A component of the market value of an option. If the strike price of a call option is cheaper than the prevailing market price, then the option has a positive intrinsic value, and is "in the money".

Investment Grade

Something classified as investment grade is, by implication, medium to high quality.

  1. In the case of a stock, a firm that has a strong balance sheet, considerable capitalization, and is recognized as a leader in its industry.
  2. In the case of fixed income, a bond with a rating of BBB or higher.

Investment Objective

The Investment objective of a fund is designed to give investors an understanding of the style of a investment management employed and to outline the regions, sectors and asset classes in which a fund invests.

Investment Trusts

These are similar to unit trusts but are governed by company law. The number of shares in issue is normally fixed and the price varies according to market demand. The underlying value of an Investment Trust is called the Net Asset Value (NAV). When the share price is above the NAV price the trust is said to be trading at a Premium. When the share price is below the NAV price the trust is said to be trading at a Discount. Discounts and Premiums are normally expressed as a percentage of NAV.

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January Effect

Tendency of US stock markets to rise between December 31 and the end of the first week in January. The January Effect occurs because many investors choose to sell some of their stock right before the end of the year in order to claim a capital loss for tax purposes. Once the tax calendar rolls over to a new year on January 1st these same investors quickly reinvest their money in the market, causing stock prices to rise. Although the January Effect has been observed numerous times throughout history, it is difficult for investors to profit from it since the market as a whole expects it to happen and therefore adjusts its prices accordingly.

Jensen Alpha

The Alpha from regression of fund versus benchmark excess returns. As a performance measure it is similar to Risk Adjusted Performance (RAP) but uses Beta as the measure of risk rather than volatility (or VaR).

Junk Bond

A bond that pays a high yield due to significant credit risk.

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A risk term for describing distributions of standard deviations that are not "normal".

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The practice of using borrowings to increase gearing. The amount of leverage/gearing used by a hedge fund is expressed as a percentage of the fund. For example, if the fund has £1,000,000 and borrows another £2,000,000, to bring the total amount invested to £3,000,000, then the leverage/gearing level is 200%.


The London Inter Bank Offered Rate.


  1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity.
  2. The ability to convert an asset to cash quickly.
  3. Investing in illiquid assets is riskier because there might not be a way for you to get your money out of the investment. Examples of assets with good liquidity include blue chip common stock and those assets in the money market. A fund with good liquidity would be characterised by having enough units outstanding to allow large transactions without a substantial change in price.

    Liquidity Risk

    Risk from a lack of liquidity, ie an investor having difficulty getting their money out of an investment.

    Listed Security

    Stock or bond that has been accepted for trading by an organised and registered securities exchange. Advantages of being listed are an orderly market place, more liquidity, fair price determination, accurate and continuous reporting on sales and quotations, information on listed companies and strict regulations for the protection of securities holders.


    Time period that an investment cannot be redeemed from within a fund.

    Long Position

    Holding a positive amount of an asset (or an asset underlying a derivative instrument)

    Long / Short Hedged

    Also described as the Jones Model. Manager buys securities he believes will go up in price and sells short securities he believes will decline in price. Manager will be either net long or net short and may change the net position frequently. For example a manager may be 60% long and 100% short, giving him a market exposure of 40% net short. The basic belief behind this strategy is that it will enhance the manager‘s stock picking ability and protect investors in all market conditions.

    Longest Losing Streak

    The largest number of consecutive months of negative performance.

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    The field of economics that studies the behaviour of the economy as a whole. Macroeconomics looks at economy-wide phenomena such as changes in unemployment, national income, rate of growth, and price levels.

    Managed Accounts

    Accounts of individual investors which are managed individually by an investment manager. The minimum size is usually in excess of £3 million.

    Managed Futures

    An approach to fund management that uses positions in government securities, futures contracts, options on futures contracts and foreign exchange in a portfolio. Some managers specialise in physical commodity futures but most find they must trade a variety of financial and non-financial contracts if they have considerable assets under management.

    Management Fee

    The fees taken by the manager on the entire asset level of the investments. Normally accrued daily and deducted monthly from the fund.


    The amount of assets that must be deposited in a margin account in order to secure a portion of a party‘s obligations under a contract. For example, to buy or sell an exchange traded futures contract, a party must post a specified amount that is determined by the exchange, referred to as initial margin. In addition, a party will be required to post variation margin if the futures contracts change in value. Margin is also required in connection with the purchase and sale of securities where the full purchase price is not paid up front or the securities sold are not owned by the seller.

    Market Maker

    An Exchange member firm that is obliged to make a continuous two way price, that is to offer to buy and sell securities in which it is registered throughout the mandatory quote period.

    Market Neutral Investing

    An investment strategy that aims to produce almost the same profit regardless of market circumstances, often by taking a combination of long and short positions. This approach relies on the manager‘s ability to make money through relative valuation analysis, rather than through market direction forecasting. The strategy attempts to eliminate market risk and be profitable in any market condition.

    Market Risk

    Risk from changes in market prices

    Market Timing

    1. An accepted practice of allocating assets among investments by switching into investments that appear to be beginning an up trend, and switching out of investments that appear to be starting a downtrend.
    2. An increasingly unacceptable / illegal practice of undertaking frequent or large transactions in mutual funds. Especially where there is a time difference between the close of the relevant markets that the fund invests in and the valuation of the fund. ie a Far East fund that is valued the next day in the UK.

    Market Value

    The value at which an asset trades, or would trade in the market.

    Mark to Market

    When the value of securities in a portfolio are updated to reflect the changes that have occurred due to the movement of the underlying market. The security will then be valued at its current market price.

    Maximum Drawdown

    The worst period of fund performance for a fund. It is calculated by taking the performance from the high point to the low point in the period.

    Maximum Recovery Period

    The maximum time period required to recover from a previous Drawdown.

    Mean – Arithmetic

    The mean usually referred to is the arithmetic mean. It is the sum of a series of n numbers divided by n. A weighted arithmetic mean gives specified weights to each element. Some indices are calculated by weighting components according to their market capitalisation and/or their level of "free-float" of shares.

    Mean – Geometric

    For a series of n positive numbers, the geometric mean is obtained by multiplying the numbers together and taking the n’th root. The arithmetic mean will always be greater than or equal to the geometric mean.


    A measure of performance named after Modigliani and Modigliani. It‘s a fund‘s mean excess return, risk-adjusted to the risk level of the benchmark, less the benchmark‘s mean excess return. M-squared and Risk Adjusted Performance are simple measures but RAP risk-adjusts the benchmark to the fund while M-squared risk-adjusts the fund to benchmark.


    The most value of the "middle observation" in a series of monthly investment returns.

    Merger Arbitrage

    Sometimes called Risk Arbitrage, involves investment in event-driven situations such as leveraged buy outs, mergers and hostile takeovers. Normally the stock of an acquisition target appreciates while the acquiring company‘s stock decreases in value.

    Mezzanine Level

    Stage of a company‘s development just prior to its going public. Venture capitalists entering at that point have a lower risk of loss than at previous stages and can look forward to early capital appreciation as a result of the market value gained by an initial public offering.


    The behaviour and purchasing decisions of individuals and firms.

    Minimum Acceptable Rate (MAR)

    Used in the calculation of Downside Deviation. It represents the return below which an investor considers a loss to have occurred. In calculating Downside Deviation only returns below MAR are counted. Typical settings for MAR are the risk-free return and zero.


    The most frequent observation in a series of monthly investment returns.

    Modern Portfolio Theory (MPT)

    Introduced by Harry Markowitz with his paper "Portfolio Selection" which appeared in the 1952 Journal of Finance. Thirty-eight years later, he shared a Nobel Prize with Merton Miller and William Sharpe for what has become a broad theory for portfolio selection and corporate finance. MPT is the philosophical opposite of traditional stock picking. It is the creation of economists, who try to understand the market as a whole, rather than business analysts, who look for what makes each investment opportunity unique. Investments are described statistically, in terms of their expected long-term return rate and their expected short-term volatility. The volatility is equated with "risk", measuring how much worse than average an investment's bad years are likely to be. The goal is to identify your acceptable level of risk tolerance, and then to find a portfolio with the maximum expected return for that level of risk. The conclusion of MPT is that the scientific way to attain a diversified portfolio is by using the Sharpe Ratio to invest in low cost index funds.

    Money market funds

    These funds stick with safe, short-term debt instruments such as commercial paper, banker's acceptances, repurchase agreements and certificates of deposit. Because they have low risk, they typically provide the lowest returns among mutual funds. Their main uses are to park money between investments, hold emergency savings and to save for short-term goals. A small investment in money markets may also reduce some risk in a long-term investment account.

    Money-weighted return

    A method of calculating returns when there are cash flows during the period. It is the internal rate of return which equates the intermediate cash flows and final portfolio with the initial portfolio. The money- weighted return method assumes that the same return applies over the whole period, unlike the time-weighted method where changes are taken into account. The time-weighted method is preferable but the portfolio values at the time of each cash flow must be known in order to calculate it. Mutual Funds calculate unit prices daily, taking into account sales and repurchases, so it is simple to calculate time-weighted returns for funds. For a portfolio, if the return during the period does not does not fluctuate greatly and the cash flows are not large compared to the size of the portfolio then the difference between the time-weighted and money-weighted returns method should be small.

    Mortgage Backed Security

    A pass-through security that aggregates a pool of mortgage-backed debt obligations. Mortgage-backed securities’ principal amounts are usually government guaranteed. Homeowners’ principal and interest payments pass from the originating bank through a government agency or investment bank, to investors, net of a loan servicing fee payable to the originator.

    Multi-Manager Product

    An investment pool that allocates assets to a number of managers with different investment styles. This methodology facilitates a high degree of diversification and accordingly the potential for a greater spread of risk. Hedge funds often have this structure. Smaller investors are able to enjoy access to a greater variety of managers that would normally be prohibited by minimum investment requirements for each manager. Funds of funds are a classic multi-manager product.

    Municipal Bond (USA)

    A debt security issued by a state, municipality, or county, in order to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state the bond is issued. Such expenditures might include the construction of highways, bridges, or schools. "Munis" are bought for their favourable tax implications, and are popular with people in high income tax brackets.

    Mutual Fund

    A security that gives small investors access to a well diversified portfolio of equities, bonds, and other securities. Each shareholder participates in the gain or loss of the fund. Shares are issued and can be redeemed as needed. The fund's net asset value (NAV) is determined each day. Each mutual fund portfolio is invested to match the objective stated in the prospectus. Some examples of mutual funds are UK Unit Trusts, Open-ended Investment Companies (OEICs), EU registered UCITS, Luxembourg based SICAVs.

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    The National Association of Real Estate Investment Trusts


    A computerized system established by the NASD to facilitate trading by providing broker/dealers with current bid and ask price quotes on over-the-counter stocks and some listed stocks. Unlike the Amex and the NYSE, the Nasdaq (once an acronym for the National Association of securities Dealers Automated Quotation system) does not have a physical trading floor that brings together buyers and sellers. Instead, all trading on the Nasdaq exchange is done over a network of computers and telephones. Also, the Nasdaq does not employ market specialists to buy unfilled orders like the NYSE does. The Nasdaq began when brokers started informally trading via telephone; the network was later formalized and linked by computer in the early 1970s. In 1998 the parent company of the Nasdaq purchased the Amex, although the two continue to operate separately. Orders for stock are sent out electronically on the Nasdaq, where market makers list their buy and sell prices. Once a price is agreed upon, the transaction is executed electronically.

    Net Asset Value (NAV)

    The NAV price is calculated by dividing the value of the assets of the fund less the applicable annual charges and fees, by the number of shares in issue. The NAV price is therefore the value per share before any sales charges are added.

    Net Exposure

    The exposure level of a fund to the market. It is calculated by subtracting the short percentage from the long percentage. For example if a fund is 100% long and 30% short, then the net exposure is 70% long.

    Nominee Name

    Name in which a security is registered and held in trust on behalf of the beneficial owner.

    Non-Distributor Status

    Effectively an offshore fund which accumulates income within the fund and pays no dividends. All gains from this type of fund are taxed as income. This will result in most cases in an investor having to pay more tax than would be required with a Distributor fund.

    Normal Distributions

    A set of distributions of returns that have the same general shape. They are symmetric with returns more concentrated in the middle than in the tails. Normal distributions are sometimes described as bell shaped. The height of a normal distribution can be specified mathematically in terms of two parameters the mean (m) and the standard deviation (s). Investment managers use a normal distribution when calculating the Value at Risk (VaR).

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    Offer Price

    The price at which investors buy units from the manager. The offer price normally includes any establishment, sales and commission charges.


    Located or based outside of one's national boundaries. Typically these locations have preferential tax treatments and fund legislation.


    An Open Ended Investment Company does not have a fixed capital. The number of shares or units in issue can be varied according to demand. They are very similar to Unit Trusts but are subject to Company Law not Trusts Law. Units are normally quoted on a single price basis with charges highlighted separately.

    Open-Ended Fund

    There is no limit to the number of units or shares issued by the fund. Units are created according to the number of units purchased by investors.

    Opportunistic Investing

    A general term describing any fund that is opportunistic in nature. These types of funds are usually aggressive and seek to make money in the most efficient way at any given time. Investment themes are dominated by events that are seen as special situations or short-term opportunities to capitalise from price fluctuations or imbalances, such as initial public offering.


    The right, but not the obligation, to buy or sell an asset at an agreed price on or before a fixed date and time in the future.


    A mathematical process to obtain the optimum asset allocation for a portfolio from a given range of assets. The input variables are normally risk and return.


    Generally associated with the Relative Strength Index. RSI readings below 30 are considered oversold and readings above 70 considered overbought. The choice of overbought and oversold levels is discretionary and much will depend on the individual fund. Generally, a RSI that rises above 30 from oversold levels is bullish and a RSI that falls from overbought levels below 70 is bearish.

    Over the Counter- OTC

    A security traded in some context other than on a formal exchange such as the LSE, NYSE, DJIA, TSX, AMEX, etc. A stock is traded over the counter usually because the company is small and unable to meet listing requirements of the exchanges. Also known as unlisted stock, these securities are traded by brokers/dealers who negotiate directly with one another over computer networks and by phone. The Nasdaq, however, is also considered to be an OTC market, with the tier 1 being represented by companies such as Microsoft, Dell and Intel. Instruments such as bonds do not trade on a formal exchange and are thus considered over-the-counter securities. Most debt instruments are traded by investment banks making markets for specific issues. If someone wants to buy or sell a bond, they call the bank that makes the market in that bond and ask for quotes. Many derivative instruments such as forwards, swaps and most exotic derivatives are also traded OTC.

    Out of the Money

    This refers to options :

    1. For a call, when an option's strike price is higher than the market price of the underlying stock.
    2. For a put, when the strike price is below the market price of the underlying stock.
    3. Basically, an option that would be worthless if it expired today.


    Locking in a price, such as through a futures contract, for more goods, commodities or securities that is required to protect a position. While hedging does protect a position, over-hedging can be costly in the form of missed opportunities. Although you can lock in a selling price, over-hedging might result in a producer or seller missing out on favourable market prices. For example, if you entered into a January futures contract to sell 25,000 shares of "Smith Holdings" at $6.50 per share you would not be able to take advantage if the spot price jumped to $7.00.

    Overlay Strategy

    A type of derivatives strategy. This strategy is often employed to provide protection from currencies or interest rate movements that are not the primary focus of the main portfolio strategy.


    Refers to an investment position that is larger than the generally accepted benchmark. For example, if a company normally holds a portfolio whose weighting of cash is 10%, and then increases cash holdings to 15%, the portfolio would have an overweight position in cash.

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    Pair Trading

    The strategy of matching a long position with a short position in two stocks of the same sector. This creates a hedge against the sector and the overall market that the two stocks are in. The hedge created is essentially a bet that you are placing on the two stocks; the stock you are long in versus the stock you are short in. It's the ultimate strategy for stock pickers, because stock picking is all that counts. What the actual market does won't matter (much). If the market or the sector moves in one direction or the other, the gain on the long stock is offset by a loss on the short.

    Past Performance

    The past is not necessarily a guide to the future. This caveat invariably and properly appears when historical investment performance is analysed. An analyst or investor therefore needs a clear view of what he hopes to achieve by historical performance analysis and its limitations.

    Percent Long

    The percentage of a hedge fund invested in long positions

    Percent Short

    The percentage of a hedge fund that is sold short.

    Performance Fee

    The fee payable to the fund adviser on new profits earned by the fund for the period.

    Period Returns

    Period Returns are used to isolate periods of out-performance or under-performance that can be hidden by cumulative returns. Period returns are normally analysed on a rolling monthly or quarterly basis.

    Portfolio Turnover

    The number of times an average portfolio security is replaced during an accounting period, usually a year.


    1. The total cost of an option. The premium of an option is basically the sum of the option's intrinsic and time value. It is important to note that volatility also affects the premium.
    2. The difference between the higher price paid for a fixed-income security and the security's face amount at issue. If a fixed-income security (bond) is purchased at a premium, existing interest rates are lower than the coupon rate. Investors pay a premium for an investment that will return an amount greater than existing interest rates.

    Price Earnings Ratio (P/E Ratio)

    A valuation ratio of a company's current share price compared to its per-share earnings. Calculated as : Market Value per Share Earnings per Share (EPS) EPS is usually from the last four quarters (trailing P/E), but sometimes can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation is the sum of the last two actual quarters and the estimates of the next two quarters. Sometimes the P/E is referred to as the "multiple," because it is how much investors are willing to pay per dollar of earnings. In general, a high P/E means high projected earnings in the future. However, the P/E ratio actually doesn't tell us a whole lot by itself. It's usually only useful to compare the P/E ratios of companies in the same industry, or to the market in general, or against the company's own historical P/E.

    Private Equity Market Risk

    The market risk for private equity depends to a certain degree on the small cap and high-tech IPO market. A reduction in the IPO market activities limits the exit possibilities in many private equity investments.

    Private Placement / Private Equity

    When equity capital is made available to companies or investors, but not quoted on a stock market. The funds raised through private equity can be used to develop new products and technologies, to expand working capital, to make acquisitions, or to strengthen a company's balance sheet. The average individual investor will not have access to private equity because it requires a very large investment. The result is the sale of securities to a relatively small number of investors. Private placements do not have to be registered with organizations such as the FSA, SEC because no public offering is involved.

    Profitable Percentage

    The percentage of profitable monthly returns from a fund in a given period.

    Proprietary Trading

    When a firm trades for direct gain instead of commission dollars. Essentially, the firm has decided to profit from the market rather than commissions from processing trades. Firms who engage in proprietary trading believe they have a competitive advantage that will enable them to earn excess returns.


    In the case of mutual funds, a prospectus describes the fund's objectives, history, manager background, and financial statements. A prospectus makes investors aware of the risks of an investment and in most jurisdictions is required to be published by law.

    Put Option

    An option giving the holder the right, but not the obligation, to sell a specific quantity of an asset for a fixed price during a specific period.

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    Qualitative Analysis

    Analysis that uses subjective judgment in evaluating securities based on non-financial information such as management expertise, cyclically of industry, strength of research and development, and labour relations. It uses financial information derived from company annual reports and income statements to evaluate an investment decision. Some examples are financial ratios, the cost of capital, asset valuation, and sales and earnings trends.

    Quasi Sovereign Bond

    Debt issued by a public sector entity that is, like a sovereign bond, guaranteed by the sovereign, however there is a difference in that there may be a timing difference in repayment in the unlikely event of default.

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    A statistical measure that represents the percentage of a fund's or security's movements that are explained by movements in a benchmark index. It is a measure of correlation with the benchmark. R-squared values range from 0 to 100. An R-squared of 100 means that all movements of a security are completely explained by movements in the index. ie perfect correlation. In a regression R-squared measures the proportion of the variance of one variable explained by the variance of the other variable. R-squared is equivalent to the correlation squared. R-squared says nothing about the direction of cause and effect. The industry assumes that an R squared below 0.3 has no correlation to the market.


    The frequency at which fund redemptions are accepted by the fund. Liquidity risk should be an integral part of any risk assessment.


    A statistical procedure to establish the relationship between two variables, for example fund and benchmark excess returns. Each point is plotted on a graph and a line of best fit is calculated. The slope of the line is called the regression Beta. The intercept with the axis is called the Alpha.

    Relative Downside Deviation

    Where a fund compared to a benchmark is the fund Downside Deviation divided by the benchmark Downside Deviation. Relative Downside Deviation of greater than one indicates that the fund is more risky than the benchmark, less than one indicates that it is less risky.

    Relative Strength Index

    Was developed by J. Welles Wilder. The Relative Strength Index (RSI) is a momentum oscillator that moves between 0 and 100. Its name can be confusing because it does not compare the strength of one fund against another. Rather, RSI compares the magnitude of gains against the magnitude of losses. The Relative Strength Index = Average Gain / Average Loss.

    Relative Volatility

    Where a fund compared to a benchmark is the fund volatility divided by the benchmark volatility. A fund with a Relative Volatility of greater than one indicates that the fund is more volatile than the benchmark, less than one indicates that it is less volatile.

    Reporting Agent

    A third party that analyses and verifies the returns of a fund.

    Repurchase Agreement (Repo)

    A form of short term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day. For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement. Repos are classified as a money-market instrument. They are usually used to raise short-term capital.


    The percentage increase in value of an investment for a given period. If X is the starting value and Y is the finishing value the return is 100 x (Y/X – 1). For the calculation of return where there are cash flows during the period see Time-weight and Money-weighted Return.


    This denotes the unpredictability of investment returns. The standard measure of risk is volatility, measure by the standard deviation of excess returns. Alternative measures of risk are Value at Risk, Beta, Downside Deviation. Tracking Error is sometimes referred to as a risk measure as it denotes the unpredictability of investment returns around the benchmark.

    Risk Adjusted Performance (RAP)

    Where a fund is it‘s mean excess return less the mean excess return of the risk-adjusted benchmark. On an Efficiency chart for where risk is measured by volatility or Value at Risk, the RAP is shown by the distance of the fund point above the Efficiency line.

    Risk Adjusted Benchmark

    A fund is usually somewhat more or less risky than it‘s benchmark. The benchmark excess return can be risk-adjusted to any level using a notional combination of benchmark and risk-free assets. For example, a combination of 75% benchmark and 25% risk-free has a risk of 75% of the benchmark. It also has 75% of the benchmark excess return. Combinations that are more risky than the benchmark can be obtained if it is assumed one can borrow at the risk-free rate. The risk/return combinations are shown by the efficiency line on an efficiency chart. When the benchmark has been risk adjusted to the same level of risk as the fund their excess returns can be then properly compared.

    Risk Adjusted Rate of Return

    A measure of how much risk a fund or portfolio took on to earn its returns, usually expressed as a number or a rating. This is often represented by the Sharpe Ratio. The more return per unit of risk, the better.

    Risk Arbitrage

    A broad definition for three types of arbitrage that contain an element of risk:

    1. Merger and Acquisition Arbitrage - The simultaneous purchase of stock in a company being acquired and the sale (or short sale) of stock in the acquiring company.
    2. Liquidation Arbitrage - The exploitation of a difference between a company's current value and its estimated liquidation value.
    3. Pairs Trading - The exploitation of a difference between two very similar companies in the same industry that have historically been highly correlated. When the two company's values diverge to a historically high level you can take an offsetting position in each (e.g. go long in one and short the other) because, as history has shown, they will inevitably come to be similarly valued.

    In theory true arbitrage is riskless, however, the world in which we operate offers very few of these opportunities. Despite these forms of arbitrage being somewhat risky, they are still relatively low-risk trading strategies which money managers (mainly hedge fund managers) and retail investors alike can employ.

    Risk Free

    The risk-free return is the return that a fund manager could have obtained with certainty by placing funds on deposit. For a sterling-based investor it is normally given by the yield achieved from short term gilts or by the interbank deposit rate for the relevant holding period.

    Risk-Free Rate

    The quoted rate on an asset that has virtually no risk. The rate quoted for US treasury bills are widely used as the risk free rate.

    Risk Measure

    There a several ways of measuring risk including: beta, standard deviation (volatility), tracking error, semi-variance and downside deviation, Each measure provides a different insight into the dispersion of returns around their mean level.

    Risk Reward Ratio

    This is closely related to the Sharpe Ratio, except the risk reward ratio does not use a risk free rate in its calculation. The higher the risk reward ratio, the better. Calculated as : Annualised rate of return Annualised Standard Deviation.

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    Santa Claus Rally

    The rise in US stock prices that sometimes occurs in the week after Christmas, often in anticipation of the January effect.

    Secondary Market

    A market in which an investor purchases an asset from another investor, rather than an issuing corporation. A good example is the London Stock Exchange. All stock exchanges are part of the secondary market, as investors buy securities from other investors instead of an issuing company.

    Sector Fund

    A mutual fund whose objective is to invest in a particular indus try or sector of the economy to capitalize on returns. Because most of the stocks in this type of fund are all in the same industry, there is a lack of diversification. The fund tends to do very well or not well at all, depending on the conditions of the specific sector.


    General name for all stocks and shares of all types.

    Securities Lending

    When a brokerage lends securities owned by its clients to short sellers. This allows brokers to create additional revenue (commissions) on the short sale transaction.


    A financial instrument through which a municipality or parastatal (owned or controlled wholly or partly by the government) borrows money from the public in exchange for a fixed repayment plan.


    A special case of Downside Deviation where the Minimum Acceptable Return (MAR) for each period is the risk-free rate of return plus the mean excess return.

    Sharpe Ratio

    When a fund is the mean excess return dividend by the volatility (measured by standard deviation). On an efficiency chart for which risk is measured by volatility, the Sharpe Ratio is the slope of the line joining the fund point and the risk-free point.

    Short selling

    This involves borrowing an equity or other instrument and selling it in anticipation of being able to repurchase it at a lower price in the market, at or before the time when it must be repaid to the lender. Both short selling and leverage are regarded as risky when practiced in isolation.

    Short Selling Market Risk

    The market risk for short selling is due to the fact that the profit is limited and the loss is unlimited.

    SICAV - Société d'Investissement à Capital Variable

    It is a French or Luxembourg incorporated company that is responsible for the management of a mutual fund (unit trust) and manages a portfolio of securities. The share capital is equal to the net assets of the fund. The units in the portfolio are delivered as shares and the investors are referred to as shareholders. SICAVs are common fund structures in Luxembourg.


    Phrase used to describe returns that are not "normal". Returns with a positive skew are sought by risk averse investors. Reality more often delivers a negative skew.

    Small Caps

    Stocks or funds with smaller capitalisation. They tend to be less liquid than blue chips, but they tend to have higher returns.

    Soft Commissions

    A means of paying brokerage firms for their services through commission revenue, as opposed to normal payments. For example, a mutual fund may offer to pay for the research of a brokerage firm by executing trades at the brokerage.

    Sortino Ratio

    Similar to the Sharpe Ratio, except that instead of using standard deviation as the denominator, it uses Downside Deviation. The Sortino Ratio was developed to differentiate between "good" and "bad" volatility in the Sharpe Ratio. If a fund is volatile on the upside (which is generally a good thing) its Sharpe ratio would still be low. To quote the Sortino web site:

    "A comparable downside risk ratio that has come to be called the Sortino ratio has for the numerator the difference between the return on the portfolio and the Minimum Acceptable Return (MAR). The denominator for the Sharpe ratio is standard deviation, and for the Sortino ratio it is downside deviation."

    Sovereign Debt

    A debt instrument guaranteed by a government.

    Special Situations Investing

    Strategy that seeks to profit from pricing discrepancies resulting from corporate event transactions such as mergers and acquisitions, spin-offs, bankruptcies or recapitalisations. Type of event-driven strategy.

    Specific Risk

    Risk that affects a very small number of assets. This is sometimes referred to as "unsystematic risk." An example would be news that is specific to either one stock or a small number of stocks, such as a sudden strike by the employees of a company you have shares in or a new governmental regulation affecting a particular group of companies. Unlike systematic risk or market risk, specific risk can be diversified away.

    Spin Off

    A new, independent company created through selling or distributing new shares for an existing part of another company. Spinoffs may be done through a rights offering.


    Lead investors in a fund who supply the seed money. Often the general partner in a hedge fund.


    1. The difference between the bid and the offer prices of a security or asset.
    2. An options position established by purchasing one option and selling another option of the same class, but of a different series.

    Standard Deviation

    Tells us how much the return on the fund is deviating from the expected normal returns. It is a common measure of risk (volatility).

    Sterling Ratio

    Similar to the Sharpe Ratio, except that instead of using standard deviation as the denominator, risk is defined as the average yearly maximum drawdown over the last 3 years plus an arbitrary 10%.

    Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor’s loss on a security position. This is sometimes called a "stop market order." In other words, setting a stop-loss order for 10% below the price you paid for the stock would limit your loss to 10%.

    Strike Price

    The stated price per share for which underlying stock may be purchased (for a call) or sold (for a put) by the option holder upon exercise of the option contract.


    Traditionally, the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. Recently, swaps have grown to include currency swaps and interest rates swaps. If firms in separate countries have comparative advantages on interest rates, then a swap could benefit both firms. For example, one firm may have a lower fixed interest rate, while another has access to a lower floating interest rate. These firms could swap to take advantage of the lower rates.

    Swaption (Swap Option)

    The option to enter into an interest rate swap. In exchange for an option premium, the buyer gains the right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date.

    Swing Trading (Swings)

    A style of trading that attempts to capture gains in a stock within one to four days. To find situations in which a stock has this extraordinary potential to move in such a short time frame, the trader must act quickly. This is mainly used by at-home and day traders. Large institutions trade in sizes too big to move in and out of stocks quickly. The individual trader is able to exploit the short-term stock movements without the competition of major traders. Swing traders use technical analysis to look for stocks with short-term price momentum. These traders aren't interested in the fundamental or intrinsic value of stocks but rather in their price trends and patterns.

    Systematic Risk

    The potential variability of returns of an investment caused by general market influences such as interest rate, inflation & tax changes. This element of risk cannot be eliminated through diversification.

    Systemic Risk

    Risk that threatens an entire financial system.

    S&P500 - Standard & Poor's Index of the New York Stock Exchange

    A basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value, and its performance is thought to be representative of the stock market as a whole.

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    Time Horizon

    The minimum time period which an investor must have in mind when choosing to invest in a particular asset class. For equity based investments the recommended time period is at least 5-7 years.

    Time-weighted return

    A method of calculating return where there are cash flows during the period. Returns for each sub-period between cash flows are calculated and these are accumulated to obtain the return for the total period. The time-weighted return represents the return for £1 of the portfolio that remains invested from beginning to end. In practice the intermediate portfolio values are not always know in which case the money-weighted return method has to be used.


    In making estimates time-weighting counts recent data more heavily than distant data. Unweighted estimates treat all data equally. By time-weighting the impact of a very good (or a very bad month) reduces gradually over time.

    Time Value

    The amount by which an option's premium exceeds its intrinsic value. Also called time premium.

    Top-Down Investing

    An investment strategy which first finds the best sectors or industries to invest in, and then searches for the best companies within those sectors or industries. This investing strategy begins with a look at the overall economic picture and then narrows it down to sectors, industries and companies that are expected to perform well. Analysis of the fundamentals of a given security is the final step.

    Total Return

    The measure of performance where both dividends and capital growth are included in the return.

    Tracing Error

    The specific risk for a fund, i.e. the component of a fund’s risk that is independent of the benchmark. Note that tracking error squared plus beta squared equals volatility squared.

    Traded Endowment Policy - TEP

    An Endowment Policy is a type of life insurance that has a value that is payable to the insured if he/she is still living on the policy's maturity date, or to a beneficiary otherwise. They are normally "with profits policies". If the insured does not wish to wait until maturity to receive the value they can either surrender it back to the issuing insurance company, or they can sell the policy on the open market. If the policy is sold it then becomes a Traded Endowment Policy or TEP. TEP Funds aim to buy and sell TEPs at advantageous prices to make a profit.

    Traded Options

    Transferable options with the right to buy or sell a standardised amount of a security at a fixed price within a specified period.

    Traditional Investments

    Includes equities, bonds, high yield bonds, emerging markets debt, cash, cash equivalents.

    Treasury Bill

    A negotiable debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of one year or less. Exempt from state and local taxes. Also called Bill or T-Bill or U.S. Treasury Bill.

    Treynor Ratio

    When a fund is the mean monthly excess return divided by the Beta. For the benchmark the divisor is 1. It is a measure of efficiency similar to the Share Ratio but with Beta as the risk measure rather than volatility.

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    Umbrella Fund

    An open-ended investment Company (OEIC/SICAV) with sub-funds or compartments, each with its own specific investment objectives. The umbrella structure allows investors to select particular funds investing in different geographical regions or industrial sectors within the same investment vehicle.

    Underlier or Underlying Security

    A security or commodity which is subject to delivery upon exercise of an option contract or convertible security. Exceptions include index options and futures , which cannot be delivered and are therefore settled in cash.


    A situation where a portfolio does not hold a sufficient amount of securities to satisfy the accepted benchmark of the portfolio's asset allocation strategy. For example, if a portfolio normally holds 40% stock and currently holds 30%, the position in equities would be considered underweight.

    UCITS - Undertakings for Collective Investment in Transferable Securities

    Funds with UCITS accreditation can be freely sold across the EU, hence the term "fund passport", though they are subject to local marketing and tax laws. The initial UCITS directive strictly limited the assets in which funds could invest. Future & Options and Funds of Funds were specifically excluded. This limitation has been relaxed through UCITS II.

    Unit Trust

    A common form of collective investment (similar to a mutual fund) where investors money is pooled and invested into a variety of shares and bonds in order to reduce risk. Its capital structure is open ended as units can be created or redeemed, depending on demand from investors. It should be noted that a Unit Trust means something completely different in the US.

    Unsystematic Risk

    Sometimes called Specific or Idiosyncratic risk and is the potential variability of returns of an investment caused by specific items such as management, profitability, liquidity & default. It can be eliminated through diversification.

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    Value-Added Monthly Index (VAMI)

    An index that tracks the monthly performance of a hypothetical $1000 investment. The calculation for the current month's VAMI is: Previous VAMI x (1 + Current Rate of Return) The value-added monthly index charts the total return gained by an investor from reinvestment of any dividends and additional interest gained through compounding. The VAMI index is sometimes used to evaluate the performance of a fund manager.

    Value at Risk (VaR)

    A measure of the risk of a fund or benchmark. It is calculated as 1.65 times volatility. Roughly interpreted one would not expect a loss of more than VaR in 19 periods out of 20 on average. In 1 period out of 20 one would expect the loss to be more severe. These are averages so it does not mean that a loss greater than the VaR in one period cannot be followed by another in the following period. VaR depends on the time horizon chosen. For instance the VaR for a 3-month time horizon is greater than for a 1-month time horizon, though it is less than 3 times as great. Some of the short-term volatility cancels out over the longer period. However, relative VaRs are the same for any time horizon so VaR is a good way of comparing the relative risk of funds and benchmarks.

    Value Investor

    Warren Buffet is the most famous value investor, he buys companies that may be trading at a discount to their intrinsic value. Buy low, sell high at it's elegant best. He invests only for the long term, in companies who's earnings he can reasonably predict, and has strong economics working in their favor. That means that the business makes lots of money, and is free to improve its own profitability through re-investment. He selects businesses that he understands well, which is why he avoids the technology sector, and companies that he would like personally to participate in. But, once identified, he waits for the right price before he buys. Patience as a financial virtue. In particular, he looks for companies that exhibit a consumer monopoly, or provide a product or service that is special, and inspires its own consumer loyalty. Among the holdings of Buffett's company, Berkshire Hathaway, have been The Washington Post Company, Coca-Cola, GEICO and Gillette.

    Value Stocks

    Stocks which are perceived to be selling at a discount to their intrinsic or potential worth, ie undervalued; or stocks which are out of favour with the market and are under-followed by analysts. It is believed that the share price of these stocks will increase as the value of the company is recognised by the market.

    Venture Capital

    Money and resources made available to start-up firms and small businesses with exceptional growth potential. Venture capital often also includes managerial and technical expertise. Most venture capital money comes from an organized group of wealthy investors who seek substantially above average returns and who are willing to accept correspondingly high risks. This form of raising capital is increasingly popular among new companies that, because of a limited operating history, can't raise money through a debt issue. The downside for entrepreneurs is that venture capitalists usually receive a say in the major decisions of the company in addition to a portion of the equity.

    Volatility of fund or benchmark monthly excess returns

    A measure of their variability from the mean. Volatility is a measure of risk, calculated as the standard deviation of excess returns. Although usually calculated on the basis of monthly returns, volatility is often quoted as an annualised figure to facilitate comparison with annualised returns.

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    A certificate usually issued along with a bond or preferred stock, entitling the holder to buy a specific amount of securities at a specific price, usually above the current market price at the time of issuance, for an extended period, anywhere from a few years to forever. In the case that the price of the security rises to above that of the warrant's exercise price, then the investor can buy the security at the warrant's exercise price and resell it for a profit. Otherwise, the warrant will simply expire or remain unused. The main difference between warrants and call options is that warrants are issued and guaranteed by the company, whereas options are exchange instruments and not issued by the company. Also, the lifetime of a warrant is often measured in years, while the lifetime of a typical option is measured in months. Warrants are often included in a new debt issue as a "sweetener" to entice investors.

    Winning Ratio

    The number months with positive returns divided by the number of months with negative returns and is expressed as a percentage. i.e. If over a period of 36 months, 24 months are positive and 12 are negative the Winning Ratio is ( 24 / 36) x 100.

    Withholding Tax

    Tax deducted from dividends which are paid to investors who are non-residents. Tax can often be reclaimed if there is a double taxation agreement with the investor‘s country.

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    1. The annual rate of return on an investment, expressed as a percentage.
    2. For bonds and notes , the coupon rate divided by the market price. This is not an accurate measure of total return, since it does not factor in capital gains.
    3. For securities, the annual dividends divided by the purchase price. This is not an accurate measure of total return, since it does not factor in capital gains. Also called dividend yield or current yield.

    Yield Curve

    A curve that shows the relationship between yields and maturity dates for a set of similar bonds , usually Treasuries , at a given point in time.

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    Zero Coupon Bond

    A bond which pays no coupons , is sold at a deep discount to its face value, and matures at its face value. A zero-coupon bond has the important advantage of being free of reinvestment risk, though the downside is that there is no opportunity to enjoy the effects of a rise in market interest rates . Also, such bonds tend to be very sensitive to changes in interest rates, since there are no coupon payments to reduce the impact of interest rate changes. In addition, markets for zero-coupon bonds are relatively illiquid.

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Stock market is better than cash
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Intro to pensions - UK
Intro to pensions - Australia
Intro to pensions - South Africa
Do tax cuts only benefit the rich?
Interest, inflation & GDP forecasts
List of world currencies & symbols