Hedge Answers

Absolute-return fund

An absolute return fund attempts to perform positively for investors regardless of general direction or market conditions by investing in a range of long and short positions with low correlation to the markets. An absolute-return fund measures the gain or loss of the portfolio as a percentage of capital invested.

ABX

ABX, also known as the asset-backed securities index, is a credit derivative with asset-backed securities underlying it.

Accredited investor Rule 501 or Regulation D of the Securities Act of 1933

Defines an “accredited investor” as any of the following:

• A bank, insurance company, registered investment company, business development company, or small business investment company.
• An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million.
• A charitable organization, corporation, or partnership with assets exceeding $5 million.
• A director, executive officer, or general partner of the company selling the securities.
• A business in which all the equity owners are accredited investors.
• A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of purchase.
• A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
• A trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

Administrator

A service provider hired by an investment manager to calculate performance and net asset value for the fund, perform record-keeping functions, perform fund accounting, act as transfer agent, and maintain all books and records for the fund manager.

Alpha

The premium investment return of an investment over a benchmark index such as the S&P 500. Positive alpha indicates that the investment manager has earned a premium over the index and returns are driven by the manager, not the index. The stronger the investment results relative to the index, the stronger the management team of the investor.

Alternative assets

Include any non-traditional investments that would not be found in the standard investment portfolio. Alternative assets include hedge funds, private equity funds, real estate partnerships, forestry investments, and oil and gas partnerships.

Arbitrage

An investment strategy that attempts to exploit the price difference between the same or similar financial instruments, commodities, or currencies. An arbitrageur may buy a contract for crude oil in the New York market at a lower price and simultaneously sell it in the Chicago market at a higher price.

Assets under management

Assets under management (AUM) includes all investments, leveraged and unleveraged, including cash, that are managed by a fund manager.

Average rate of return

Sometimes referred to as ROR, the average return of investment over a fixed period of time. ROR is used to compare returns on investments over a period of time, and are usually expressed on an annualized basis.

Back-test

Back testing uses historical data to evaluate past performance results. Often referred to as a hypothetical portfolio, it simulates investment returns over a past period of time to determine the performance outcome if the strategy had been followed in the past.