Alternative Investments

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Glossary

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Absolute Return
A common term in the hedge fund industry, absolute returns are synonymous with positive returns. Hedge funds target absolute returns versus mutual funds which target returns relative to a benchmark.

Accumulation
Another way of saying professional buying. A stock is under accumulation when volume expands on days when price increases.

Accredited Investor
A term used by provincial and territorial securities regulatory bodies to define financially sophisticated investors that can purchase hedge funds and other exempt securities for lower minimums than other investors. Typically, individual accredited investors must have a liquid net worth of $1 million or earn income of $200,000 in each of the previous two years or earn a combined $300,000 income in conjunction with their spouse.

Active Management
Investment strategy that actively manages a portfolio with the objective of producing returns in excess of a specified benchmark.

Administrator
Processes subscriptions and redemptions and calculates the value of the investors' holdings, either as a NAV or as a partnership share ¾ and usually looks after other back-office needs such as fund accounting and unitholder records.

Alpha
Alpha is the value added by active managers and is not related to systematic market movements, providing diversification and positive returns in down markets. Alpha measures the excess return after market sources of returns are removed from the analysis.

Alternative Asset Class
A term commonly used to refer to non-traditional assets (versus traditional assets like stocks, bonds and cash) such as hedge funds, managed futures, real estate, private equity and collectibles (such as art, coins, wine, etc). The diversification benefits of adding alternative investments to traditional portfolios are due to the low correlation of alternative investments to traditional investments.

Alternative Investment Strategies (AIS)
Portfolio management strategies that invest in alternative asset classes.

Annualized Return
Converts a rate of return to an annual basis.

Annualized Sharpe Ratio
See Sharpe ratio.

Annualized Standard Deviation
See Standard deviation.

Arbitrage
Arbitrage is the market-neutral buying and selling of a security to take advantage of price discrepancies in different markets. However, the definition has broadened from the same security to securities that have similarities ¾ for example, an arbitrageur might construct a hedge by buying a company's convertible bond and shorting the same firm's common stock.

Asset Allocation
An investment process whereby the total portfolio assets are divided among traditional assets (such as stocks, bonds and cash) and alternative assets (such as hedge funds, managed futures, real estate, private equity and collectibles) in an effort to reduce overall portfolio risk and improve risk-adjusted returns through portfolio diversification. This is achieved by adding lowly correlated assets together and is the basis of Modern Portfolio Theory.

Basis Point
One-hundredth of one percentage point, or 0.01 per cent. Therefore 1.0 per cent equals 100 basis points. Basis points are an easy way to state small differences in yield. For example, a return of 6.0 per cent is 50 basis points greater than a return of 5.5 per cent.

Bear Market
A prolonged decline in the prices in stocks, bonds, commodities or any other asset class. A bear market is usually brought on by declining or poor market fundamentals.

Benchmark
A standard against which the performance of a fund or investment can be measured.

Beta
Beta is the investment’s exposure to market movements. For example, a beta of 0.7 with respect to the S&P implies that an S&P movement of 1% will cause a 0.7% movement in the same direction in the fund.

Beta
Beta (Β) is a measure of the volatility of an investment in relation to a market index or benchmark. A beta of 1.0 indicates that the fund will exhibit volatility similar to the market's. A beta of less than 1.0 indicates less-than-market volatility and a beta of more than 1.0 indicates more-than-market volatility. In essence, beta reflects how sensitive the returns of an investment are to the market's movements.

Bottom-Up Investing
An approach to investing which seeks to first identify well-performing individual securities before considering the impact of economic trends in the general economy when making an investment decision.

Bull Market
A sustained rise in the prices in stocks, bonds, commodities or any other asset class. A bull market is usually brought on by improving or positive market fundamentals.

Buy the Index
Purchasing an investable index fund as opposed to an actively managed fund.

Call Option
An option contract that gives its holder the right (but not the obligation) to purchase a specified number of shares of the underlying stock at the given strike price, on or before the expiration date of the contract.

Capacity
This term refers to the maximum size a fund can grow to before liquidity and other problems arise.

Capping
Hedge funds typically close or cap a fund to new investment when they reach capacity.

Capital Gains
The difference between the buy and sell price of an asset. You could have a capital gain or a capital loss, depending on the price you paid and the price you sold at. For example, a capital gain on stock ABC purchased for $150,000 and sold for $160,000 would be $10,000 and a capital loss on stock XYZ purchased for $100,000 and sold for $95,000 would be $5,000. Capital gains and capital losses receive favourable tax treatment versus income tax gains and losses.

CARR (compound annualized rate of return)
CARR calculates the return of an investment on a per-year compounded basis.

Carry Trade
Investment position involving the borrowing of funds or investments at a relatively low interest rate and the simultaneous purchase of an offsetting position earning a higher yield.

Category
Hedge funds styles and strategies fit into three broad categories: Relative Value, Event-Driven and Opportunistic.

Charts
Pictorial representations of specific stock characteristics such as price and volume that technical analysts use to price equities.

Closed Fund
A fund that is closed to new investment but may be available on a secondary market.

Closed-End Fund
A type of fund that issues a set number of shares and typically trades on a stock exchange with daily liquidity at market price. Unlike more traditional open-end funds, transactions in shares of closed-end funds are based on their market price as determined by the forces of supply and demand in the marketplace. The market price of a closed-end fund may be above (premium) or below (discount) the value of its underlying portfolio (or net asset value).

Commodity Pools
Commodity pools are similar to mutual funds with the notable exception that commodity pools invest in futures and options whereas mutual funds invest in stocks and bonds.

Compound Annual Return
Also referred to as the compound annual growth rate (CAGR). Compound return measures the annual growth rate of an investment over a specific period.

Contrarian
Investment strategy that invests contrary to prevailing market trends.

Convertible Bond Arbitrage
This hedge strategy involves investing in bonds (or preferred shares) that can be exchanged for the issuing firm's stock at a pre-set price. The manager routinely goes long an undervalued convertible bond while hedging out the market risk by short-selling the common stock.

Convertible Security
Generally a bond, preferred stock or warrant that can be exchanged for a set number of common shares of the issuing corporation at a prestated conversion price.

Correlation
Measures the degree to which two variables (such as a fund and its benchmark) move together. A correlation coefficient varies from -1.0 to 1.0. -1.0 indicates perfect negative correlation and +1.0 indicates perfect positive correlation.

Counterparty Risk
The risk that each party of a contract faces that the other party will default on their obligations.

CPO (Community Pool Operator)
Person who holds investment responsibilities for a commodity pool's assets.

Critical Mass
A fund's critical mass is the minimum size needed to accomplish its trading objectives and operate efficiently enough to satisfy the profit needs of the fund company.

CTA (Commodities Trading Advisor)
Commodity trading advisors are professional managed futures managers that are also referred to as CPOs (commodity pool operators).

Cumulative Return
The total compound return an investment earned over a specific period.

Custodian
Person or institution entrusted with the safekeeping of a client's securities.

Cyclicals
Cyclical stocks rise and fall in step with the economic cycle.

DSC (Deferred Sales Charge)
A fee charged when you sell DSC-class fund shares. Also known as a back-end load, these deferred charges typically go down each year you hold the fund, until eventually they reach zero. Deferred sales charges give investors a way to avoid sales charges altogether if the fund is held for several years.

Derivatives
Derivatives are investments that are "derived" from something else. For example, options are derivatives because the option has an underlying stock, commodity or other asset on which its price is based. Futures, forwards and options are the most common types of derivatives, which are used to generate returns and/or hedge away certain risks.

Directional
Directional trading involves taking long or short positions on the belief that profits can be made by correctly predicting the direction of a security.

Distressed Securities
Distressed-securities funds buy debt, equity or "trade claims" of companies that are bankrupt or otherwise in financial trouble. Until these firms are restructured or other remedial action has been taken, their securities often trade significantly below par value and attract distressed securities managers anxious to benefit from a turn-around they expect can be realized.

Diversification
A strategy that seeks to minimize overall portfolio volatility (risk) by spreading investments across multiple securities and lowly correlated asset classes. Diversification is the basic premise behind Modern Portfolio Theory.

Dow Jones Industrial Average (DJIA)
A price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including, stocks that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest U.S. companies are performing.

Downside Standard Deviation
Also known as semi-variance or semi-deviation, downside standard deviation is similar to standard deviation except that it only considers returns below a defined target. The target can be a constant (example 1%), a series (equity benchmark or index) or the investment's own mean return.

Drawdown
A drawdown refers to any peak-to-valley decline a fund has suffered, and usually is quoted as the percentage decline from the peak to the trough.

Due Diligence
Due diligence refers to both the quantitative and qualitative investigation process conducted prior to making an investment decision by a prudent person exercising reasonable care.

Early Redemption Policy
Charge levied to an investor that redeems units of a fund before a specified date. Early redemption penalties discourage short-term trading in a fund.

Efficient Frontier
An efficient frontier is a line of Pareto optimal portfolios created from a risk-return graph that plots standard deviation (risk) on the x-axis and return on the y-axis. These optimal portfolios along the curve have the highest return for a given level of risk or the lowest risk for a given level of return. Points above the curve are theoretically impossible whereas points below the curve are not efficient.

Efficient Market Hypothesis
The efficient market hypothesis is a controversial and often-disputed theory that states that fundamental and / or technical analysis cannot lead to excess market returns because markets are fully efficient and as such incorporate all relevant information about every security.

Emerging Markets
An investment strategy where the manager focuses on investing (mostly on the long side) in the securities of companies from emerging or developing countries. Investing in emerging markets can be very volatile, and may also involve currency risk, political risk, and liquidity risk.

Equity Hedge Investing
See Long/Short Equity

Equity Market Neutral
Funds employing this strategy structure portfolios with minimal market exposure by having the same dollar and beta-adjusted long and short exposure. Having little or no correlation to the marketplace, they are insulated ("neutralized") against the market ups and downs that otherwise determine much of a portfolio's return.

Event-Driven Investing
An investment strategy seeking to identify and exploit pricing inefficiencies that have been caused by corporate events, such as a mergers, spin-offs, or bankruptcies. Event-Driven strategies involve attempting to predict the outcome of a particular transaction as well as the optimal time at which to commit capital to it. The uncertainty about the outcome of these events creates investment opportunities for managers who can correctly anticipate their outcomes. Merger Arbitrage and Distressed Securities are the main event-driven strategies.

Execution Risk
Execution risk is the danger that a deal cannot be completed because no one can be found to meet the price and/or other terms being sought.

Exposure
Exposure (or "market exposure") is the percentage of a fund's holdings that is invested in the market.

Factor Regression Analysis
Factor Regression Analysis allows one to investigate the financial factors driving fund performance. The formula of a fund’s performance is the following:

Performance = alpha + beta * (performance of factor) – expenses.

Fee-Based Accounts
Fee-based accounts feature low and steady annual fees with little to no transaction costs. The financial advisor's compensation is directly related to the size of the assets rather than the level of trading activity. These accounts are popular with fee-sensitive clients.

Fixed-Income Arbitrage
This strategy aims to profit from temporary price inefficiencies among related fixed-income securities and their derivatives. The strategy will typically go long and short two related debt securities in an attempt to capture a converging spread. An example would be to go long corporate bonds and short government bonds of similar duration.

Front-End Load
A front-end load is a charge levied to a fund at the time it is purchased.

Fund Codes
Alphanumeric codes used to identify funds for purchases and redemptions in the investment management industry. For example, the BluMont Hirsch Performance Fund's code is BCC 500.

Fund Manager
Appointed by the trustee and responsible for the governance and management of the hedge fund, with authority to hire third parties including investment advisors, custodians, administrators, etc. Typically the sponsor/promoter and fund manager are one in the same.

Fund of Hedge Funds
A fund of funds invests in a number of hedge funds and hedge fund strategies that generally are uncorrelated to each other. Generally, a fund of hedge funds will have at least 20 separate funds under its umbrella of investments.

Fund Sponsor/Promoter
Handles marketing and client services.

Fundamental Equity Analysis
An equity valuation method that analyzes the fundamental characteristics of a stock in an effort to determine the intrinsic value of that security. Fundamental managers analyze financial statements, evaluate the management of companies and determine the impact of macroeconomic and industry conditions on the price of stocks.

Futures Contract
Traded on an organized exchange and based on the exchange's rules, a futures contract constitutes an agreement calling for the delivery of a commodity at a pre-determined future date at a price established at the time of contracting.

Gap Risk
Refers to the risk that the price of a security will move sharply without any accompanying volume or trading activity.

General Partner
The only partner in a limited partnership that faces unlimited liability. The General Partner is often the manager of the day-to-day activities of the partnership.

Global Macro
This strategy carries long and short positions in any of the world's major capital or derivative markets.

Gross Exposure
The total of a fund's long and short positions in relation to the assets of the fund. For example, if the fund is 80 per cent long and 50 per cent short, then the fund is 130 per cent gross invested.

Growth Stocks
Stock that has displayed higher-than-market earnings gains and is expected to continue to show high rates of earnings growth. Growth stocks will typically have a higher price/earnings ratio and often do not pay dividends.

Hedging
An investment strategy that attempts to reduce the risk of losses by taking offsetting positions in related securities. An example would be to simultaneously buy a stock and a put option on the same stock that would enable you to sell the security at a given price.

Hedge Fund
An investment vehicle wherein the investment manager is allowed the freedom and flexibility to invest in a variety of markets and to utilize investments and strategies with variable long/short exposure and degrees of leverage.

High-Net-Worth Sector
Refers to wealthy private investors.

High-Water Mark
If the value of the fund falls below its previous peak (or "high-water mark"), no performance fees may be charged until after a new historical high has been achieved.

Hurdle Rate
The minimum amount a hedge fund needs to earn before performance fees are charged.

Incentive Fee
See Performance Fee.

Index
A composite of securities that serves as a barometer for the overall market or some segment of it. The best known of these are the DJIA and the S&P 500, both of which reflect the performance of large American companies. In Canada, the S&P/TSX is the most widely followed index.

Index Arbitrage
Index arbitrage involves trading the difference in value between the stock index futures and the underlying stocks.

Index Fund
A passively managed fund that mirrors the performance of a specific index. These funds typically charge very low fees and appeal to investors who recognize that most mutual funds fail to beat broad indexes such as the S&P 500.

Inefficiencies
See Market Inefficiencies.

Information Ratio
The information ratio evaluates the return a manager adds over and above a relative index, given the risk that manager assumes.

Information Statement
A legal document similar to an offering memorandum that states the risk and return objectives, terms and investment parameters of a specific fund.

Institutional Sector
Refers to institutional investors such as endowments and foundations.

Interest-Rate Swap
An agreement between two parties that wish to switch floating-rate loan payments for fixed-rate loan payments in the same or different currencies. The rationale behind interest rate swaps is that one party may have access to better fixed-rates and the other may have access to better floating rates.

IPOs (Initial Public Offerings)
The initial public sale of stock by a private company. IPOs are usually smaller firms who need capital from external shareholders to expand operations. IPO investments are risky as the value of the stock on the first trading day can be extremely volatile.

Issuer
Entity that offers securities or investment vehicles for sale.

Jones Model
Developed and launched by sociologist and journalist Alfred Winslow Jones in 1949. While traditional mutual fund models took only long positions in stocks, Jones's Model, a limited partnership, combined long positions (in favored stocks) with short positions (in stocks expected to decline) in the same sector, thus insulating or "hedging" the model against market movement. The return earned by the model would depend on the manager's skill in stock selection rather than on the movement of the market. The model thus targeted an absolute return rather than a relative return to the market's performance. See Long/short equity.

Kurtosis
Kurtosis characterizes the relative ‘peakedness’ or flatness of a distribution compared with the normal distribution. Larger kurtosis indicates a relatively peaked distribution. Lower kurtosis indicates a relatively flat distribution. The kurtosis for a normal distribution is 3.

Large-Cap Securities
Stocks with a market capitalization over approximately $1 billion in Canada. For example, Royal Bank.

Largest Monthly Gain
An investment's highest monthly gain since inception.

Largest Monthly Loss
An investment's highest monthly loss since inception.

Leverage
Involves borrowing money to invest in the hopes of earning a greater rate of return than the rate at which the additional monies were borrowed.

Liability
A financial obligation, or the cash outlay that must be made at a specific time to satisfy the contractual terms of such an obligation.

Limited Partnership (L.P.)
A partnership that includes one or more partners who have limited liability.

Liquidity
An asset is said to be "liquid" or "have liquidity" when it may be converted into cash quickly with no reduction in price.

Lock-Up Period
A period of time when investors are unable to exit an investment. Lock-ups are common for funds that are designed as mid-to-long-term investments.

Long Exposure
The percentage of a fund's assets that are invested in long positions. For example, a manager may be 100-per-cent long and 60-per-cent short, giving him a market exposure of 40 per cent net long. The higher the long exposure, the more a fund is exposed to the market.

Long Position
A long position is established when an investor buys a security. For example, an owner of 1,000 shares of stock is said to be "long the stock".

Longest Drawdown in Months
The longest drawdown period for a particular investment. It is not necessarily the length of the maximum drawdown.

Longest Recovery in Months
The most months an investment's net asset value has taken to recover from the lowest point of a drawdown back to the NAV it had when the drawdown first began.

Long/Short Equity
This strategy buys undervalued stocks and short sells overvalued stocks. Long/short funds typically benefit from variable exposure (they can be net long, market neutral or even net short) and the use of leverage. This is the most common type of hedge fund today.

M&A
Abbreviation for Mergers & Acquisitions. See also Merger Arbitrage.

Maximum Drawdown
Maximum Drawdown is the largest loss, peak to trough, the fund has experienced over the relevant investment period.

Macroeconomics
Involves analyzing big-picture trends in global markets and major currencies, and other large-scale economic factors.

Managed Futures
This globally oriented investment strategy involves trading in listed financial, currency and commodity futures markets. In managed futures funds, one may expect to find futures and forward contracts representing a wide range of items from agricultural products and livestock to gold, silver, interest rates and stock indexes.

Management Fee
A fixed percentage fee charged to the fund for ongoing portfolio management services. The fee is typically calculated based upon the assets under management at the beginning or end of a specific period, and is unrelated to the fund's performance.

Margin Call
A brokerage firm will make a margin call when a client's position (that was established using borrowed funds) declines past a certain point. When margin calls occur, the client must either deposit additional funds into their account or sell of part of the position.

Market Capitalization
The total market value of a company or stock. Market capitalization is calculated by multiplying the number of outstanding shares by their current market price. Investors generally divide equity markets into three basic market caps: Large-Cap, Mid-Cap and Small-Cap.

Market Inefficiencies
Occur when securities valuations fail to reflect all relevant information in a timely matter. Astute investors can profit from market inefficiencies.

Market Neutral
See Equity market neutral

Market Risk
The risk of loss from fluctuations in securities prices.

Market Timing
An investment strategy that allocates assets among different asset classes depending on the manager's view of the economic or market outlook. Unpredictability of market movements and the difficulty of timing entry and exit from markets add to the volatility of this strategy.

Mark to Market
Valuing a security based on its current market value. Frequent mark to market valuations ensure that prices of securities reflect their true market value.

Maximum Drawdown
The maximum drawdown refers to the largest peak-to-valley decline a fund has suffered since inception, and usually is quoted as the percentage decline from the peak to the trough.

Merger Arbitrage
Merger arbitrage is a form of event-driven trading involving the simultaneous purchase of stock in a company that is in the process of being taken over, and short-selling the stock of the firm intent on making the acquisition. This strategy involves a calculated bet that the proposed deal will be approved by regulators and shareholders alike.

Mid-Cap Securities
Stocks with a market capitalization of approximately $250 million to $1 billion in Canada.

Modern Portfolio Theory
A portfolio management theory that seeks to maximize risk-adjusted returns and optimize portfolios through security valuation, diversification, and asset allocation strategies.

MSCI (Morgan Stanley Capital International) World Index
An index that tracks the stocks of approximately 1,300 companies representing the stock markets of 22 countries.

Multi-Manager Fund
Fund that allocates investment management responsibilities to more than one manager.

Multi-Strategy Fund
Fund that invests assets among various strategies and (usually) numerous managers.

Mutual Fund
A security that allows a group of investors to pool their money together and gain access to a diversified portfolio of equities, bonds, and / or other securities. Each mutual fund has a specific investment objective and must respect the investment parameters outlined in an legal offering document called a prospectus.

Naked Long
Refers to a directional long position that is not hedged.

Naked Short
Refers to a directional short position that is not hedged.

NASDAQ (National Association of Securities Dealers Automatic Quotation System)
An index and electronic quotation system that provides price quotations to market participants about companies that are leaders across all areas of business including technology, retail, communications, financial services, transportation, media and biotechnology industries. About 3300 companies trade on the NASDAQ.

NAV (Net Asset Value)
The total value of the fund's assets less liabilities. Equal to the closing market value of all securities within a portfolio plus all other assets, subtracting all liabilities, and then dividing the result by the total number of shares outstanding.

Net Exposure
The percentage of a fund that is currently net invested in the market. It is calculated as the difference between the long and the short positions. For example, if a fund is 100 per cent long and 25 per cent short, then the fund is 75 per cent net long.

Net Long
A portfolio with long exposure that exceeds short exposure.

Net Rate of Return
Measures a fund's return net of all fees and expenses.

Net Short
A portfolio with short exposure that exceeds long exposure.

Non-Cyclicals
Defines stocks in industries that face constant demand. For example, the health care industry.

Non-Directional
Non-directional strategies aim to profit from fully or partially hedged positions rather than making directional bets on securities. Non-directional strategies like most arbitrage funds tend to have a low correlation to traditional assets and to directional hedge funds.

Offering Memorandum (O.M.)
A legal document that states the risk and return objectives, terms and investment parameters of a specific fund.

Offshore Fund
A fund that is managed and domiciled in a foreign country.

Opportunistic
Opportunistic hedge fund strategies include such directional and highly flexible styles as Global Macro, Equity Long/Short, Equity Non-Hedge, Emerging Markets and Short Selling. These styles typically generate higher levels of return and volatility than less directional styles.

Options
A right sold by one person to another that offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security at an agreed-upon price during a certain period of time or on a specific date.

P-Value
P-Value measures the statistical significance of the contribution of a given factor. The smaller the P-Value, the more significant the contribution of the factor. Generally, any P-Value less than 0.05 is considered significant.

Pairs Trading
An investment strategy that seeks to buy a relatively undervalued security and simultaneously short sell a relatively overvalued security with similar characteristics (same industry / sector, market capitalization, etc).

Pari Passu
Meaning the same in strategy, rights and privileges ("of equal step" in Latin).

Passive Management
Investment strategy that replicates the performance of a specified index or benchmark.

Percentage of Positive Months
The percentage of months that delivered positive returns since the inception of an investment.

Performance
The profits and losses of an investment over a specific period.

Performance Fee
Hedge fund managers typically levy a 20% performance or incentive fee, whereby the fund manager retains 20% of all profits above a high water mark.

Prospectus
Legal document that describes a mutual fund's objectives, managers, terms and investment parameters.

Pooled Fund
Any fund in which multiple investors contribute assets and hold them as a group. A common example of a pooled fund is a unit trust.

Portfolio Parameters
Legal restrictions placed on a fund's investment mandate and codified in the offering documents

Position
The amount of a security either owned (long position) or borrowed (short position) by an individual or by a dealer.

Prime Broker
Provides services such as securities lending, leveraged trade executions, and cash management, among other things, to fund management firms.

Private Equity
Refers to equity capital offered to private investors rather than being offered publicly on an exchange.

Proprietary System/Money
Private securities trading methodology developed by an investment management firm.

Put Options
An option contract giving the owner the right, but not the obligation, to sell a specific amount of an underlying security at a certain price within a given time.

Qualitative Analysis
Subjective securities analysis and selection based on qualitative criteria such as management expertise and cyclicality of industry.

Quantitative Analysis
Securities analysis and selection based on quantitative data derived from financial statement ratios and other publicly available data.

R-Squared
R-Squared is the explanatory value of the regression as a whole; the higher the R-Squared, the more the fund’s performance can be explained by the regression factors. The highest possible value is 1, representing 100% of the movement being explained by the independent factors.

Redemption Charge
A fee charged upon a voluntary redemption from an investment fund.

Relative Return
Refers to the return of an investment relative to some benchmark

Relative Value
Relative Value strategies generate profits by capturing the spread between two closely related securities. For example, an investor can buy a relatively undervalued off-the-run U.S. Treasury Bills and simultaneously short a relatively overvalued on-the-run U.S. Treasury Bills with the same duration.

Rate of Return
The percentage gain or loss of a security over a particular period.

Risk Arbitrage
See Merger arbitrage

Risk Premium
In the equity market it is the reward for holding a market security rather than a risk-free asset. In the fixed income market it is the difference between Treasury and non-Treasury bonds of comparable maturity.

S&P (Standard and Poors)
Standard & Poors is one of the world's foremost providers of independent credit ratings, indices, risk evaluation, investment research, data, and valuations.

S&P 500 Composite Index
An index of 500 widely held common stocks that measures the general performance of the US market.

S&P/TSX Composite Index
An index of widely held Canadian common stocks that measure the general performance of the Canadian market.

S&P/TSX Total Return Index
The value of the S&P/TSX with dividends re-invested over time.

Sharpe Ratio
The Sharpe Ratio is a measure of risk-adjusted performance. It measures the excess return earned per unit of risk taken. Annualized Sharpe Ratio converts the monthly ratio to an annual figure.

Sharpe Ratio
Sharpe Ratio is a measure of risk adjusted return. It is computed by taking the excess annualized return of a fund or portfolio over the risk free rate, in this case Libor, and dividing this number by the annualized volatility of the fund or portfolio. (rFund – rLibor) / (volatilityFund).

Short Exposure
The percentage of a fund's assets that are invested in short positions. For example, a manager may be 60 per cent long and 100 per cent short, giving him a market exposure of 40 per cent net short.

Short-Selling
The act of borrowing stock to sell high today with the expectation of buying it back at a lower price in the future and then returning the stock to the lender. An investor pays a stock lender a small fee to borrow the shares (usually arranged by a brokerage firm).

Short Squeeze
A situation in which a lack of supply and an excess demand for a traded stock forces the price upward causing losses for short sellers. Short squeezes occur more often in thinly traded small cap stocks and losses from short squeezes are accentuated when a number of short sellers attempt to cover a short position simultaneously.

Single-Strategy Fund
Fund that invests assets in a single strategy and one or more managers.

Skewness
Skewness measures the symmetry of a return distribution around its mean. Zero skewness indicates a symmetrical distribution. A positively skewed distribution is the outcome of many rather small losses and fewer, larger gains, so it has a long tail on the right-hand side of the distribution, which is usually desirable. Conversely, a negatively skewed distribution is the outcome of many small gains and fewer, larger losses, so it has a long tail on the left-hand side of the distribution, which is usually not desirable. Small-cap securities
Stocks with a market capitalization of less than $250 million in Canada.

Sortino Ratio
The Sortino ratio a measure of return per unit of risk. Whereas the Sharpe ratio focuses on all volatility ("good" or "bad"), Sortino uses the downside standard deviation to highlight only the bad volatility ¾ which is what concerns investors the most. Sortino compares portfolio return to a MAR (minimum acceptable return), which sometimes is defined as treasury-bill yields.

Special Situations
An investment strategy that invests in event-driven situations such as mergers, hostile takeovers, reorganizations, or leveraged buyouts.

Squeeze
See Short Squeeze

Standard Deviation
Standard deviation measures a set of (return) data in relation to its mean. Increasing levels of dispersion around the mean lead to higher standard deviations, indicating a higher degree of volatility. Annualized standard deviation converts the monthly deviation to an annual figure.

Statistical Arbitrage
This strategy profits from temporary pricing discrepancies between related securities. This irregularity offers an opportunity to go long the cheaper security and to short the more expensive one. As the prices of the two to revert to their norm, or mean, gains will be realized.

Stock Symbol
A unique symbol assigned to a security. Stock symbols are also known as tickers or ticker symbols.

Stop-Loss Measures
Stop-loss measures are designed to limit trading losses by automatically selling a position when a certain price is reached.

Strategy
The investment approach a manager takes to reach the fund's objectives. For example, Global Macro is a strategy within the Opportunistic style of hedge funds. Strategy and style [often] used interchangeably.

Stress-Testing
A simulation technique used on investment portfolios to determine their potential reactions to different financial shocks.

Structured Products
The term is chiefly industry jargon to describe expertly engineered products offering exposure to a variety of investment strategies in an investor-friendly package.

Style
Hedge funds can be categorized into three main styles: Relative Value, Event-Driven and Opportunistic. Each of these styles has a few to several different strategies. Style and strategy [often] used interchangeably.

Style Drift
The tendency of a manager to deviate from the fund's specific strategy.

Survivorship Bias
The overestimation of historical returns caused by poor performing funds dropping out while strong performers continue to exist. Both hedge funds and mutual funds experience survivorship bias.

Technical Analysis (Technicals)
Securities analysis and selection based on analyzing statistics generated by market activity, such as prices and volume. The security's intrinsic value is of no consequence to the technical trader.

Top-Down Investing
An approach to investing which seeks to first identify economic trends in the general economy before considering the industries and then the companies that should benefits from those trends.

Total Return
The full amount an investment earns over a specific period of time. Total return takes into consideration three factors: changes in the NAV or price; any dividends; and compounding. The return is expressed as a percentage and is associated with a time period such as six months, one year, five year or since inception.

Tracking
A measure of how closely a fund track its respective benchmark or index.

Transparency
Refers to the level of information on a particular fund available to the investor.

Treynor Ratio
The Treynor ratio calculates the excess return of a portfolio for every unit of market risk (beta). This differs from the Sharpe ratio because it focuses on beta, rather than standard deviation.

Trustee
An individual who holds or manages assets for the benefit of another.

TSE
(Toronto Stock Exchange)

TSX
The TSX is the largest and most widely followed common stock index in Canada. Formerly called the TSE.

Valuation
Value or worth on an asset. Security valuation is usually based on market price.

Value-at-Risk (VaR)
A technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends, volatilities and correlations.

Value Stocks
Stock believed to be selling at a discount to its intrinsic value. Value investors believe they can take profit from buying value stocks.

Variable Exposure
Exposure can range from net short to net long. Opportunistic strategies like global macro and long/short equity tend to have variable exposure to the markets.

Volatility
A measure of dispersion of returns typically represented by the annualized standard deviation of an investment. Highly volatile investments experience considerable swings in price. Portfolio volatility can be reduced through diversification.

Volatility
Volatility is traditionally measured by the standard deviation, a measure of how widely dispersed the returns are from the mean. A more volatile fund has more risk because its returns tend to fluctuate by greater amounts around its average return.

White label
Customized private label version of an existing fund.

Yield
The percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest paid on a bond.