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
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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)
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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
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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
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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%
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Yield - the dividend per share
divided by the price per share
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