General partner
The individual or firm that organizes and manages a limited partnership,
such as a hedge fund. The general partner assumes unlimited legal responsibility
for the liabilities of a partnership.
Global-macro investment strategy
An approach in which a fund manager seeks to anticipate broad trends
in the worldwide economy. Based on those forecasts, the manager chooses
investments from a wide variety of markets -- i.e. stocks, bonds, currencies
& commodities. The approach typically involves a medium-term holding
period and produces high volatility. Many of the largest hedge funds follow
global-macro strategies. They are sometimes called "macro" or
"global directional-investment" funds.
Hedge fund
A private investment vehicle whose manager receives a significant
portion of its
compensation from incentive fees tied to the fund's performance
-- typically 20% of annual gains over a
certain hurdle rate, along with a management fee equal to 1% of
assets. The funds, often organized as limited partnerships,
typically invest on behalf of high-net-worth individuals and
institutions. Their primary objective is often to preserve
investors'capital by taking positions whose returns are not
closely correlated to those of the broader financial markets.
Such vehicles may employ leverage, short sales, a variety of
derivatives and other hedging techniques to reduce risk and increase
returns.
The classic hedge-fund concept, a long/short investment strategy
sometimes referred to as the Jones Model,
was developed by Alfred Winslow Jones in 1949.
High-water mark
A provision serving to ensure that a fund
manager only collects incentive fees on the highest net
asset value previously attained at the end of any prior fiscal
year -- or gains representing actual profits for each investor.
For example, if the value of an investor's contribution falls to,
say, $750,000 from $1 million during the first year,
and then rises to $1.25 million during the second year, the
manager would only collect incentive fees from that investor
on the $250,000 that represented actual profits in year-two.
Hurdle rate
The minimum return necessary for a fund manager to start collecting incentive fees.
The hurdle is usually tied to a benchmark rate such as Libor or the one-year Treasury bill rate plus a spread.
If, for example, the manager sets a hurdle rate equal to 5%, and the fund returns 15%, incentive fees would only
apply to the 10% above the hurdle rate.
Incentive fee (performance fee)
The charge -- typically 20% -- that a fund
manager assesses on gains earned during a given 12-month period. For
example,
if a fund posts a return that is 40% above its hurdle rate, the
incentive fee would be 8% (20% of 40%) -- provided that the high-water
mark
does not come into play.
Inception date
The day on which a fund starts trading.
Jensen's Alpha
A risk-adjusted performance measure that represents the average return
on a portfolio over and above that predicted by the capital asset pricing model (CAPM),
given the portfolio's beta and the average market return. This is the portfolio's alpha.
In fact, the concept is sometimes referred to as "Jensen's alpha."
Kurtosis
In probability theory and statistics,
kurtosis (from the Greek word kurtos, meaning bulging) is a measure of
the "peakedness" of the probability distribution of a real-valued random
variable. Higher kurtosis means more of the variance is due to
infrequent extreme deviations, as opposed to frequent modestly-sized
deviations.
In probability theory and statistics,
kurtosis (from the Greek word kurtos, meaning bulging) is a measure of
the "peakedness" of the probability distribution of a real-valued random
variable. Higher kurtosis means more of the variance is due to
infrequent extreme deviations, as opposed to frequent modestly-sized
deviations.
Lamp letter
A May 6, 1997, "no-action letter" from the SEC to Lamp Technologies of Dallas indicating that
an online hedge-fund database would not violate restrictions against marketing hedge funds. The landmark letter cleared
the way for others to launch hedge-fund performance databases on the Internet, and expressed the SEC's opinion that such
databases did not represent the type of general hedge-fund advertising that was prohibited under rule
502(c) of Regulation D under the Securities Act of 1933
Leverage
The borrowed money that an investor employs
to increase buying power and increase its exposure to an
investment. Users of leverage seek to increase their overall invested
amounts in hopes that the returns on their positions
will exceed their borrowing costs. The extent of a fund's leverage is
stated either as a debt-to-equity ratio or as a percentage
of the fund's total assets that are funded by debt. Example: If a
fund has $1 million of equity capital and it borrows another
$2 million to bring its total assets to $3 million, its leverage can
be stated as "two times equity" or as 67%
($2 million divided by $3 million). Ratios of between two and five
to one are common. Leverage can also come in the form of short sales,
which involve borrowed securities
Limited partnership
Many hedge funds are structured as limited partnerships, which are business organizations managed by
one or more general partners who are liable for the fund's debts and obligations. The investors in such a structure are
limited partners who do not participate in day-to-day operations and are liable only to the extent of their investments.
Lock-up
The period of time -- often one year -- during which hedge-fund investors are initially prohibited from
redeeming their shares.
Long-biased investment strategy
An approach taken by fund managers who tend to hold considerably more long positions than short positions.
Long/short investment strategy
An approach in which fund managers buy
stocks whose prices they expect will increase and takes short positions
in securities (usually in the same sector) whose prices they believes
will decline. The strategy, also known as the Jones Model,
is designed to generate profits during bullish periods in the overall
stock market, while serving as a source of capital protection
in a falling stock market.
