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P

Portfolio efficient frontier

By plotting the intersection of risk and reward for different investments or weightings of assets, one can generate a risk/reward curve or 'frontier' for those investments. The efficient frontier is the point on such a curve where an investment combination delivers the most favorable balance of risk and reward.

Price trend

See Trend

Principal protection

An arrangement or mechanism built into an investment product whereby investors are assured that their initial investment is secure and that this amount will at the very least be returned to them when such a product reaches its maturity date. Principal protection features can take a variety of forms, including capital guarantees provided by banks.

Prime broker

In the context of a long/short equity approach, a prime broker acts as the intermediary between the two counterparties involved in short selling by matching a stock borrower (equity long/short manager) with a stock lender (typically a pension fund or large institution). The prime broker also collects margin payments from short sellers should the market price of the stock move against them.

Pro forma

A representation of a track record [see Track record] that is developed to show the effect on actual performance of intended or potential adjustments for different fee structures, portfolio allocations or other variations in the investment structure upon which the original track record is based. It is important to note that a pro forma is based on actual trading results and differs from a simulation, which models the hypothetical performance of a portfolio or investment approach that has yet to be applied or implemented in actual trading.

Q

Qualitative analysis

Analysis that uses subjective judgment to evaluate securities based on non-financial information such as management expertise, cyclicality of industry, strength of research and development, labor relations and depth of operational infrastructure.

Qualitative analysis evaluates important factors that cannot be precisely measured rather than the actual financial data about a company.

Quantitative analysis

Quantitative analysis uses statistical techniques to develop investment models using key financial ratios and economic indicators. The use of objective data facilitates the comparison of a large universe of securities to identify a select range of potential investment possibilities.

Quantitative analysis deals with measurable factors in contrast to qualitative considerations such as the character of management.

R

Reinsurance

Insurance for insurance companies. Coverage is provided on an indemnity basis, meaning reinsurers are liable for catastrophe claims made by the insurer’s policyholders. Direct reinsurance is typically a syndicated markets and coverage is purchased in ‘layers’ or tranches.

Retrocessional reinsurance (retro)

Reinsurance for reinsurance companies to protect themselves against catastrophic events. Traditional retro is similar to direct reinsurance in that the coverage is provided on an indemnity basis, unlike industry loss warranties which are triggered by an index of industry claims.

Risk-adjusted performance

Risk relative to return – the return achieved per unit of risk or the risk associated with a particular level of reward, typically represented by the Sharpe ratio [see Sharpe ratio]. Improving the risk-adjusted return depends either on increasing returns and maintaining the level of risk or maintaining the level of returns and lowering the associated risk.

S

Sharpe ratio

A measure of risk-adjusted performance [see Risk-adjusted performance] that indicates the level of excess return per unit of risk. In the calculation of Sharpe ratio, excess return is the return over and above the short-term risk free rate of return and this figure is divided by the risk, which is represented by the annualized volatility or standard deviation [see Volatility and Standard deviation]. The greater the Sharpe ratio the greater the risk-adjusted return.

Short selling / Short investments

A trading technique whereby an investment manager arranges to borrow stock from a stock lender with a view to selling it and buying it back at a lower price in the future.

Slippage

The difference between the sample or target price for buying or selling an asset and the actual price at which the transaction takes place.

Sortino ratio

A measure of risk-adjusted performance [see Risk-adjusted performance] that indicates the level of excess return per unit of downside risk. It differs from the Sharpe ratio [see Sharpe ratio] in that it recognizes investors' preference for upside ('good') over downside ('bad') volatility and uses a measure of 'bad' volatility as provided by semi-deviation – the annualized standard deviation of the returns that fall below a target return, say the risk free rate.

Standard deviation

A widely used measurement of risk, usually used to represent volatility [see Volatility], derived by calculating the square root of the variance of the returns of an investment from their mean.

Strategy

The particular investment process employed by a manager in the application of an investment style [see Style].

Structured product

Typically provides principal protection [see Principal protection], invests across a range of styles and managers, provides increased investment exposure [see Leverage] and requires a high level of structuring expertise with respect to blending investment approaches, financing, liquidity and risk management.

Style

An individual hedge fund’s strategy/investment approach can generally be categorized into one of five main styles: equity hedge, event driven, global macro, managed futures or relative value.  Practitioners of a particular style will have their own investment process or strategy with unique distinguishing features and techniques.
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