|
|
|
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
Active Management - the
pursuit of investment returns in excess of a specified benchmark
Active Return - return
relative to a benchmark. If a portfolio's return is 5%, and
the benchmark's return is 3%, then the portfolio's active
return is 2%
Active Risk - the risk
(annualised standard deviation) of the active return
Aggressive Growth – managers
invest in stocks of companies where there is expected acceleration
in growth of earnings per share
Alpha - The expected excess
return or the expected residual return
Arbitrage - the action
of seeking a profit where a set of assets or cash flows has
different prices in different markets
Artificial Intelligence
- the creation of models that mimic thought processes
Benchmark
- a reference portfolio for active management such as the
S&P500 or weighted average market indices. The goal of
the active manager is to exceed the benchmark return
Beta - the sensitivity
of a portfolio (or asset) to a benchmark
Breadth - the percentage
of assets or stocks advancing relative to those unchanged
or declining. Also the number of independent forecasts available
per year. A stock picker forecasting returns to 100 stocks
every quarter exhibits a breadth of 400, assuming each forecast
is independent (based on separate information)
Capital
Asset Pricing Model (CAPM) - an equilibrium based
asset pricing model developed independently by Sharpe, Lintner
and Mossin. The simplest version states that assets are priced
according to their relationship to the Market Portfolio of
all risky assets determined by the securities beta
Certainty Equivalent Return -
the certain (zero risk) return an investor would trade for
a given (larger) return with an associated risk. For example,
a particular investor might trade an uncertain expected 4%
active return with 6% risk, for a certain active return of
1.5%.
Characteristic Portfolio -
a portfolio that efficiently represents a particular asset
characteristic. For a given characteristic, it is the minimum
risk portfolio, with portfolio characteristic equal to
Commodity Futures Trading Commission
(CFTC) – is an American quasi-governmental
agency. Its role is to police several areas of business including
matters of information and disclosure, fair trading practices,
registration of firms and individuals, and the protection
of client funds, record keeping and the maintenance of orderly
futures and options markets
Commodity Trading Advisor (CTA) – is
a person who manages client money in the futures and options
markets for compensation or profit. CTAs are registered by
the CFTC
Common Factor - an element of return that
influences many assets. According to multiple factor risk
models, the common factors determine correlations between
asset returns. Common factors include size (often measured
by market capitalization), valuation measures such as P/B
and yield, industries and risk indices
Control Parameters - in a non-linear dynamic
system, the coefficient of the order parameter; the determinant
of the influence of the order parameter on the total system
Correlation – this is a measure of
how the returns from one investment is correlated to those
of another. It is very common to track the returns of hedge
funds against market indices covering their areas of focus
CUSIP - a number assigned to a security for
the purposes of information processing. For example, a company
might issue several types of equity securities (common and
preferred stocks) and several different bond issues. Each
would have a unique CUSIP number
Cycles - a full orbital period
Directional Hedge Funds –
these types of hedge funds undertake investment strategies
that rely to some extent on market movements in order to create
investment returns. Examples of such funds would include long/short
equity and global macro hedge funds
Distressed Securities – managers invest
in the equity or debt securities of companies that are in
or facing a bankruptcy, reorganization, or other distressed
situation. The investor hopes to purchase these securities
at low, or distressed prices with the hope that these securities
will appreciate when the company emerges from the distressed
situation
Dividend Discount Model - a model of asset pricing,
based on discounting the future expected dividends. Primarily
applicable to the valuation of common stocks
Dividend Discount Return - the rate of return
that equates the present value of future expected dividends
with the current market price of a security
Dividend Yield - the dividend per share divided
by the price per share. Also known as the yield
Earnings Yield
- the earnings per share divided by the price per share. The
inverse of P/E ratio
Exceptional Return - residual return plus
benchmark timing return. For a given asset with beta equal
to 1, if its residual return is 2%, and the benchmark portfolio
exceeds its consensus expected returns by 1%, then the asset's
exceptional return is 3%
Excess Return - return relative to the risk
free return. If an asset return is 3% and the risk free return
is 0.5%, then the asset's excess return is 2.5%
Fractal - an object in which
the parts are in some way related to the whole. That is, the
individual components are "self-similar." An example
is the branching network in a tree. While each branch, and
each successive smaller branching is different, they are qualitatively
similar to the structure of the whole tree
Fractal Distribution - a probability density
function that is statistically self-similar. That is, in different
increments of time, the statistical characteristics remain
the same
Fundamental Information - information relating
to the economic state of a company or economy. In market analysis,
fundamental information is related to the earnings prospects
of the firm only
Funds of Funds – managers invest in
a group of single manager hedge funds or managed accounts
which may utilize a variety of investing strategies thus creating
a diversified investment vehicle for their investors
Gearing – this term
means to borrow money for investment purposes. The amount
of gearing is usually stated as a multiple/percentage of the
initial amount being invested. Same as leverage
Hedge Fund – as absolute
return oriented investment fund that seeks to produce investment
returns from a particular investment strategy and where the
manager is partly or mostly remunerated in the form of a performance
fee
Implied Volatility - using
the Black-Scholes option-pricing model, implied volatility
is the level of the standard deviation of price changes that
equates the current option price to the other independent
variables in the formula. Often used as a measure of current
levels of market uncertainty
Income – managers invest with a focus
on yield-producing instruments and current income, with capital
appreciation as a secondary focus
Information Coefficient - the correlation
of forecast returns with their subsequent realizations. A
measure of active portfolio management skill or forecasting
skill.
Information Ratio - the ratio of annualised
expected residual return to residual risk. A central measurement
for active management, value added is proportional to the
square of the information ratio
Leverage - this term means
to borrow money for investment purposes. The amount of leverage
is usually stated as a multiple/percentage of the initial
amount being invested. Same as gearing
Limit Cycles - an attractor
for non-linear dynamic systems which has periodic cycles or
orbits in phase space
Liquidity – the ease or frequency with which
an investment can be realised
Managed Futures
– represents an industry comprised of professional money
mangers known as CTAs, who manage client assets using the
global futures and options markets as an investment medium
Market - the portfolio of all assets. This
abstract construct is typically replaced with a more concrete
benchmark portfolio such as the S&P500 Stock Index
Market Neutral-Arbitrage – managers
focus on obtaining returns with low or no correlation to the
market
Market Neutral-Securities hedging – managers
invest in securities both long and short, attempting, on average
to have a very low net market exposure. Managers generally
attempt to select longs that are undervalued and shorts that
are overvalued, theorizing that market volatility will be
minimized
Market Timing – managers switch among
asset classes in an attempt to time various markets
Maximum Drawdown – the maximum continuous
net asset value loss by a hedge fund since its launch
Modern Portfolio Theory - the blanket name
for the quantitative analysis of portfolios of risky assets
based upon expected return, or the mean expected value, and
the risk, or standard deviation of a portfolio of securities.
According to MPT, investors would require a portfolio with
the highest expected return for a given level of risk
Moving Average (MA) Processes - a stationary
stochastic process, where the observed time series is the
result of the moving average of an unobserved random time
series
Non-Directional Hedge Funds
– these types of hedge funds undertake investment strategies
which do not rely on general market movements to create investment
returns. Examples of such funds would include arbitrage and
equity market neutral hedge funds
Normal Distribution - the well known bell
shaped curve
Normal Portfolio - a benchmark portfolio
consisting of the set of all assets normally (typically) used
by the investment manager. For example, an active manager
specializing in large capitalization growth stocks might be
assigned a benchmark or normal portfolio of the S&P Growth
Index, the large capitalization growth stocks in the S&P
500 Stock Index
Opportunistic – managers
employ a variety of approaches for capital appreciation and
they “opportunistically” move to asset classes
or strategies that give what they feel are the best possible
returns
Passive Management - managing
a portfolio to match (not exceed and not lag) the return of
a benchmark
Payout Ratio - the ratio of dividends to
earnings. The fraction of earnings paid out as dividends
The Price/Earnings Ratio (P/E Ratio)
- the price of a security divided by earnings per share. Usually
the earnings per share are expected or forecasted earnings
for the coming or current fiscal year
Random Walk - Brownian motion,
where the previous change in the value of a variable is unrelated
to future or past changes
Regression - a data analysis technique that
optimally fits a model based on the squared differences between
data points and model fitted points. Typically, regression
chooses model coefficients to minimize the sum of these squared
differences
Residual Return - return independent of the
benchmark. The residual return is the return relative to beta
times the benchmark return. To be exact, an asset's residual
return equals its excess return minus beta times the benchmark
excess return
Residual Risk - the risk (annualised standard
deviation) of the residual return
Risk - in Modern Portfolio Theory, risk is
measured as the standard deviation of security returns
Risk Free Return - the return achievable with absolute
certainty. In the U.S. market, short maturity treasury bills
exhibit effectively risk free returns. The risk free return
is sometimes called the time premium, as distinct from the
risk premium
Risk Index - a common factor typically defined
by some continuous measure, as opposed to a common industry
membership factor defined as zero or one. Risk index factors
include size, volatility, value, and momentum
Risk Premium - the expected excess return
to the benchmark
Rolling of Futures - as financial futures
have short-term maturities, often 3-9 months, before or at
maturity, the future must be sold and a new future (for the
same asset but with a new maturity) must be repurchased
Several Strategies –
managers typically employ 2 or 3 specific, pre-determined
strategies in an effort to diversify their approaches. For
example, using “value”, “ aggressive growth”
and “special situations” strategies in tandem
to realize short-term and long-term gains
Sharpe Ratio – analyses the return
above the risk free rate of return in a portfolio and is usually
taken as being the return on US Treasury Bills
Short selling – this strategy is based
on finding overvalued companies and selling the shares of
those companies, even though the investor does not own these
share
Single Index Model - measures portfolio risk
by measuring the sensitivity of a portfolio of securities
to changes in a market index. The measure of sensitivity is
called the "beta" of the security, or portfolio
Skill - the ability to accurately forecast
returns and is measured using the information coefficient
Specific Return - the part of the excess
return not explained by common factors. The specific return
is independent of (uncorrelated with) the common factors and
the specific returns to other assets. It is also called the
idiosyncratic return
Specific Risk - the risk (annualised standard deviation)
of the specific return
Standard Deviation – is used as a measure
of the variability (or riskiness) of investment returns for
a fund and is calculated to describe, on average, how widely
individual data points are dispersed around the mean of all
the data points
Standard Error - the standard deviation of
the error in an estimate
Synthetics - another name for futures contracts.
A way to invest in - by earning the return of - a security
or index of securities without actually owning the security
or securities
Systematic Return - the part of the return
dependent on the benchmark-nark return. We can break excess
returns into two components: systematic and residual. The
systematic return is the beta times the benchmark-nark excess
return
Systematic Risk - the risk (annualised standard
deviation) of the systematic return
Technical Information - information
related to the momentum of a particular variable. In market
analysis, technical information is information related to
market dynamics and crowd behaviour only
Term Structure - the value of a variable
at different time increments. The term structure of interest
rates is the yield-to-maturity for different fixed-income
securities at different maturity times. The volatility term
structure is the standard deviation of returns of varying
time horizons
Value Added - is the risk
adjusted return generated by an investment strategy: the return
of the investment strategy minus the return of the benchmark
Volatility - the standard deviation of security
price changes. The annualised standard deviation of return
Yield - the dividend per
share divided by the price per share
Related info: Interest
rates |
