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A

Absolute return

An outright return achieved irrespective of overall market direction. Whereas traditional investments typically measure their success in terms of whether they track or outperform a key market benchmark or index (relative returns), hedge funds and alternative investment strategies aim to achieve outright positive returns irrespective of whether asset prices or key market indices rise or fall (i.e. absolute returns rather than relative returns).

Alpha

Widely considered to be a measure of the 'value added' by an investment manager. It is therefore regarded as a proxy for manager or strategy skill. Alpha is sometimes described as outperformance of a benchmark or the return generated by an investment independent of the market – what an investment would hypothetically achieve if the market return was zero. More specifically, alpha is sometimes described as the return of an investment less the risk-free interest rate, or the return of the portfolio less the return on the S&P 500 index or some other relevant benchmark index.

Alternative investment

The terms 'alternative investment' and 'hedge fund' are often used interchangeably as hedge funds are an important and growing part of the alternative investment arena, which also includes private equity and debt, venture capital and real estate. In the field of asset management, the essential defining feature of alternative investments is the pursuit of absolute returns. That is:

  • the quest to achieve a positive return regardless of whether asset prices are rising or falling
  • freedom to trade in a wide range of assets and instruments employing a variety of styles and investment techniques in diverse markets
  • reliance on the investment manager's skill and application of a clear investment process to exploit market inefficiencies and opportunities with identifiable and understandable causes and origins
Alternative investment managers may take advantage of pricing anomalies between related securities, engage in 'momentum' investing to capture market trends or utilise their expert knowledge of markets and industries to capture profit opportunities that arise from special situations. 

The ability to use derivatives, arbitrage techniques and, importantly, short selling – selling assets that one does not own in the expectation of buying them back at a lower price – affords alternative investment managers rich possibilities to generate growth in falling, rising and unstable markets. 

Annualised return

see Compound Annual Rate of Return

Annualised volatility

see Volatility

Arbitrage

The technique of exploiting pricing anomalies between related securities within and between markets with the aim of producing positive returns independent of the direction of broad market prices. By establishing long positions in under-valued assets and short positions in over-valued assets, arbitrageurs aim to capture profit opportunities that arise from the changing price relationship between the assets concerned. Specific investment styles that apply arbitrage techniques include convertible bond arbitrage, fixed income arbitrage, statistical arbitrage and merger or risk arbitrage.

B

Beta

A measure of how sensitive an investment portfolio is to market movements. The sign of the beta (+/-) indicates whether, on average, the portfolio's returns move in line with the market (+), or in the opposite direction (-) to the market. If the beta of a portfolio relative to a benchmark index is equal to +1, then the returns on the portfolio follow those of the index. By definition, the beta of that benchmark index is +1. A portfolio with a beta greater than +1 tends to amplify the overall movements of the market, while a portfolio with a beta between 0 and +1 tends to move in the same direction as the market but not to the same extent. A portfolio with a beta of -1 tends to move in the opposite direction to the market.

Bottom-up

An investment strategy whereby an investor considers companies based on their own merit rather than the sectors they are part of or the current economic climate. Opposite of Top-down.

C

Capacity

The amount of investment capital that can be comfortably absorbed by a manager or strategy without a diminishing of returns. One useful indication of whether or not a manager or strategy faces capacity constraints is to analyse the degree to which they experience slippage [see Slippage] in the execution of their strategy or trades.

Capital guarantee

See Principal protection.

Catastrophe bonds

These securities package a risk of catastrophic events such as earthquakes or hurricanes into a bond. These bonds typically pay a spread over 3-month LIBOR, but if the insured event occurs the issuer is relieved of the obligation to pay the interest and/or principal amount.

Classical risk control

A fund which employs stringent risk controls which have to comply to fixed risk parameters.

Commission Sharing

Commission sharing is the process whereby Man Group companies recapture some of the commission paid to brokers as part of their normal course trading activities. Recaptured commissions are used to purchase substantive research, and services directly related to the execution of trades (“research and execution services”). Recaptured commission will only ever be used to pay for research and execution services where there is reasonable benefit to clients. Commission sharing is permitted by the UK Financial Conduct Authority, our lead regulator. Please contact us should you require more information on Commission Sharing.

Commodity Asset Class

A raw material or primary agricultural product that can be bought and sold, for example oil or wheat.

Commodity Trading Adviser (CTA)

The manager or adviser of a managed futures [see Managed futures] fund. The term reflects the fact that early futures markets [see Futures] were commodities-based and were set up to enable producers and buyers to hedge against possible price movements in the underlying asset.

Compound Annual Rate of Return (CARR)

The compounded 'growth' of an investment that has been achieved each year to enable the initial price to grow to the latest selected price over a particular time period.

Constant Proportion Portfolio Insurance (CPPI)

A strategy that synthetically reproduces the pay-out of a put or call option through dynamically adjusting the delta hedge of the underlying asset. Unlike a conventional option, the investment exposure (or participation) of the underlying asset will change over the life of the structure.

Convertible bond

A bond issued by a company that has a set maturity date and pays interest in the form of a coupon. It has features of both a bond and stock and its valuation reflects both types of investments. It gives the holder the option to convert the bond into a specific number of shares of the issuing company – in other words, it has an 'embedded option'.

Correlation

A measure of the interdependence or strength of the relationship between two investments. A correlation of 1 means that the two investments are perfectly synchronised, while a correlation of -1 implies that they move in symmetrically opposite directions.

Credit

An agreement permitting a buyer to receive something of value now, with an obligation to repay this at some date in the future, generally with interest.
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