Niveau: N.v.t. Leerjaar: N.v.t.
Keyword (page) Definition (page)
1 absolute return strategies (p. 402) Absolute return strategies are hedge fund strategies that seek to minimize market risk and total risk. (p. 402)
2 annuity view of hedge fund fees (p. 393) The annuity view of hedge fund fees represents the prospective stream of cash flows from fees available to a hedge fund manager. (p. 393)
3 asymmetric incentive fees (p. 392) Asymmetric incentive fees, in which managers earn a portion of investment gains without compensating investors for investment losses, are generally prohibited for stock and bond funds offered as ’40 Act mutual funds in the United States. (p. 392)
4 at-the-money incentive fee approximation (p. 396) The at-the-money incentive fee approximation expresses the value of a managerial incentive fee as the product of 40%, the fund’s NAV, the incentive fee percentage, and the volatility of the assets (σ1 ) over the option’s life. (p. 396)
5 capacity (p. 419) Capacity is the limit on the quantity of capital that can be deployed without substantially diminished performance. (p. 419)
6 classification of hedge fund strategies (p. 400) A classification of hedge fund strategies is an organized grouping and labeling of hedge fund strategies. (p. 400)
7 closet indexer (p. 397) A closet indexer is a manager who attempts to generate returns that mimic an index while claiming to be an active manager. (p. 397)
8 consolidation (p. 384) Consolidation is an increase in the proportion of a market represented by a relatively small number of participants (i.e., the industry concentration). (p. 384)
9 convergent strategies (p. 405) Convergent strategies profit when relative value spreads move tighter, meaning that two securities move toward relative values that are perceived to be more appropriate. (p. 405)
10 diversified strategies (p. 402) Diversified strategies are hedge fund strategies that seek to diversify across a number of different investment themes. (p. 402)
11 equity strategies (p. 402) Equity strategies are hedge fund strategies that exhibit substantial market risk. (p. 402)
12 event-driven strategies (p. 402) Event-driven strategies are hedge fund strategies that seek to earn returns by taking on event risk, such as failed mergers, that other investors are not willing or prepared to take. (p. 402)
13 excessive conservatism (p. 393) Excessive conservatism is inappropriately high risk aversion by the manager, since the manager’s total income and total wealth may be highly sensitive to fund performance. (p. 393)
14 fee bias (p. 413) Fee bias is when index returns overstate what a new investor can obtain in the hedge fund marketplace because the fees used to estimate index returns are lower than the typical fees that a new investor would pay. (p. 413)
15 fund mortality (p. 401) Fund mortality, the liquidation or cessation of operations of funds, illustrates the risk of individual hedge funds and is an important issue in hedge fund analysis. (p. 401)
16 fund of funds (p. 401) A fund of funds in this context is a hedge fund with underlying investments that are predominantly investments in other hedge funds. (p. 401)
17 headline risk (p. 410) Headline risk is dispersion in economic value from events so important, unexpected, or controversial that they are the center of major news stories. (p. 410)
18 hedge fund program (p. 402) A hedge fund program refers to the processes and procedures for the construction, monitoring, and maintenance of a portfolio of hedge funds. (p. 402)
19 high-water mark (p. 390) The high-water mark (HWM) is the highest NAV of the fund on which an incentive fee has been paid. (p. 390)
20 incentive fee option value (p. 396) The incentive fee option value is the risk-adjusted present value of the incentive fees to a manager that have been adjusted for its optionality. (p. 396)
21 instant history bias (p. 416) Instant history bias or backfill bias occurs when an index contains histories of returns that predate the entry date of the corresponding funds into a database and thereby cause the index to disproportionately reflect the characteristics of funds that are added to a database. (p. 416)
22 investability (p. 419) The investability of an index is the extent to which market participants can invest to actually achieve the returns of the index. (p. 419)
23 liquidation bias (p. 416) Liquidation bias occurs when an index disproportionately reflects the characteristics of funds that are not near liquidation. (p. 416)
24 lock-in effect (p. 398) The lock-in effect in this context refers to the pressure exerted on managers to avoid further risks once high profitability and a high incentive fee have been achieved. (p. 398)
25 managerial coinvesting (p. 392) Managerial coinvesting in this context is an agreement between fund managers and fund investors that the managers will invest their own money in the fund. (p. 392)
26 managing returns (p. 399) The terms managing returns and massaging returns refer to efforts by managers to alter reported investment returns toward preferred targets through accounting decisions or investment changes. (p. 399)
27 massaging returns (p. 399) The terms managing returns and massaging returns refer to efforts by managers to alter reported investment returns toward preferred targets through accounting decisions or investment changes. (p. 399)
28 multistrategy fund (p. 401) A multistrategy fund deploys its underlying investments with a variety of strategies and sub-managers, much as a corporation would use its divisions. (p. 401)
29 off-balance-sheet risk (p. 404) Event risk is effectively an off-balance-sheet risk—that is, a risk exposure that is not explicitly reflected in the statement of financial positions. (p. 404)
30 opportunistic (p. 408) An investment strategy is referred to as opportunistic when a major goal is to seek attractive returns through locating superior underlying investments. (p. 408)
31 optimal contracting (p. 392) Optimal contracting between investors and hedge fund managers attempts to align the interests of both parties to the extent that the interests can be aligned cost-effectively, with marginal benefits that exceed marginal costs. (p. 392)
32 option view of incentive fees (p. 395) The option view of incentive fees uses option theory to demonstrate the ability of managers to increase the present value of their fees by increasing the volatility of the fund’s assets. (p. 395)
33 participation bias (p. 417) Participation bias may occur for a successful hedge fund manager who closes a fund and stops reporting results because the fund no longer needs to attract new capital. (p. 417)
34 perverse incentive (p. 393) A perverse incentive is an incentive that motivates the receiver of the incentive to work in opposition to the interests of the provider of the incentive. (p. 393)
35 pure asset gatherer (p. 397) A pure asset gatherer is a manager focused primarily on increasing the AUM of the fund. A pure asset gatherer is likely to take very little risk in a portfolio and, like mutual fund managers, become a closet indexer. (p. 397)
36 relative return product (p. 406) A relative return product is an investment with returns that are substantially driven by broad market returns and that should therefore be evaluated on the basis of how the investment’s return compares with broad market returns. (p. 406)
37 relative value strategies (p. 402) Relative value strategies are hedge fund strategies that seek to earn returns by taking risks regarding the convergence of values between securities. (p. 402)
38 representativeness (p. 415) The representativeness of a sample is the extent to which the characteristics of that sample are similar to the characteristics of the universe. (p. 415)
39 safe harbor (p. 382) In investments, a safe harbor denotes an area that is explicitly protected by one set of regulations from another set of regulations. (p. 382)
40 short volatility exposure (p. 404) Short volatility exposure is any risk exposure that causes losses when underlying asset return volatilities increase. (p. 404)
41 single-manager hedge fund (p. 401) A single-manager hedge fund, or single hedge fund, has underlying investments that are not allocations to other hedge funds. (p. 401)
42 strategy definitions (p. 417) Strategy definitions, the method of grouping similar funds, raise two problems: (1) definitions of strategies can be very difficult for index providers to establish and specify, and (2) some funds can be difficult to classify in the process of applying the definition. (p. 417)
43 synthetic hedge funds (p. 419) Synthetic hedge funds attempt to mimic hedge fund returns using listed securities and mathematical models. (p. 419)
44 black-box model trading (p. 423) Systematic fund trading, often referred to as black-box model trading because the details are hidden in complex software, occurs when the ongoing trading decisions of the investment process are automatically generated by computer programs. (p. 423)
45 breakout strategies (p. 443) Breakout strategies focus on identifying the commencement of a new trend by observing the range of recent market prices (e.g., looking back at the range of prices over a specific time period). (p. 443)
46 capacity risk (p. 453) Capacity risk arises when a managed futures trader concentrates trades in a market that lacks sufficient depth (i.e., liquidity). (p. 453)
47 commodity pools (p. 434) Commodity pools are investment funds that combine the money of several investors for the purpose of investing in the futures markets. (p. 434)
48 commodity trading advisers (CTAs) (p. 435) Commodity trading advisers (CTAs) are professional money managers who specialize in the futures markets. (p. 435)
49 conditional correlation coefficient (p. 448) A conditional correlation coefficient is a correlation coefficient calculated on a subset of observations that is selected using a condition. (p. 448)
50 counterparty risk (p. 423) Counterparty risk is the uncertainty associated with the economic outcomes of one party to a contract due to potential failure of the other side of the contract to fulfill its obligations, presumably due to insolvency or illiquidity. (p. 423)
51 countertrend strategies (p. 445) Countertrend strategies use various statistical measures, such as price oscillation or a relative strength index, to identify range-trading opportunities rather than price- trending opportunities. (p. 445)
52 degradation (p. 438) Degradation is the tendency and process through time by which a trading rule or trading system declines in effectiveness. (p. 438)
53 discretionary fund trading (p. 423) Discretionary fund trading occurs when the decisions of the investment process are made according to the judgment of human traders. (p. 423)
54 event risk (p. 429) Event risk refers to sudden and unexpected changes in market conditions resulting from a specific event (e.g., Lehman Brothers bankruptcy). (p. 429)
55 exponential moving average (p. 441) The exponential moving average is a geometrically declining moving average based on a weighted parameter, λ, with 0 < λ < 1. (p. 441)
56 fundamental analysis (p. 424) Fundamental analysis uses underlying financial and economic information to ascertain intrinsic values based on economic modeling. (p. 424)
57 global macro funds (p. 425) Global macro funds have the broadest investment universe: They are not limited by market segment, industry sector, geographic region, financial market, or currency, and therefore tend to offer high diversification. (p. 425)
58 in-sample data (p. 437) In-sample data are those observations directly used in the backtesting process. (p. 437)
59 lack of trends risk (p. 455) Lack of trends risk, which comes into play when the trader continues allocating capital to trendless markets, leading to substantial losses. (p. 455)
60 leverage (p. 429) Leverage refers to the use of financing to acquire and maintain market positions larger than the assets under management (AUM) of the fund. (p. 429)
61 liquidity risk (p. 455) Liquidity risk, is somewhat related to capacity risk in that it refers to how a large fund that is trading in a thinly traded market will affect the price should it decide to increase or decrease its allocation. (p. 455)
62 managed account (p. 435) A managed account (or separately managed account) is created when money is placed directly with a CTA in an individual account rather than being pooled with other investors. (p. 435)
63 managed futures (p. 431) The term managed futures refers to the active trading of futures and forward contracts on physical commodities, financial assets, and exchange rates. (p. 431)
64 market microstructure (p. 428) Market microstructure is the study of how transactions take place, including the costs involved and the behavior of bid and ask prices. (p. 428)
65 market risk (p. 429) Market risk refers to exposure to directional moves in general market price levels. (p. 429)
66 mean-reverting (p. 438) Mean-reverting refers to the situation in which returns show negative autocorrelation—the opposite tendency of momentum or trending. (p. 438)
67 model risk (p. 453) Model risk is economic dispersion caused by the failure of models to perform as intended. (p. 453)
68 momentum (p. 438) Momentum is the extent to which a movement in a security price tends to be followed by subsequent movements of the same security price in the same direction. (p. 438)
69 Mount Lucas Management (MLM) Index (p. 451) The Mount Lucas Management (MLM) Index is a passive, transparent, and investable index designed to capture the returns to active futures investing. (p. 451)
70 moving average (p. 438) A moving average is a series of averages that is recalculated through time based on a window of observations. (p. 438)
71 natural hedger (p. 452) A natural hedger is a market participant who seeks to hedge a risk that springs from its fundamental business activities. (p. 452)
72 out-of-sample data (p. 437) Out-of-sample data are observations that were not directly used to develop a trading rule or even indirectly used as a basis for knowledge in the research. (p. 437)
73 pattern recognition system (p. 445) A pattern recognition system looks to capture non-trend- based predictable abnormal market behavior in prices or volatilities. (p. 445)
74 private commodity pools (p. 434) Private commodity pools are funds that invest in the futures markets and are sold privately to high-net-worth investors and institutional investors. (p. 434)
75 public commodity pools (p. 434) Public commodity pools are open to the general public for investing in much the same way that a mutual fund sells its shares to the public. (p. 434)
76 random walk (p. 438) A price series with changes in its prices that are independent from current and past prices is a random walk. (p. 438)
77 relative strength index (RSI) (p. 445) The relative strength index (RSI), sometimes called the relative strength indicator, is a signal that examines average up and down price changes and is designed to identify trading signals such as the price level at which a trend reverses. (p. 445)
78 robustness (p. 437) Robustness refers to the reliability with which a model or system developed for a particular application or with a particular data set can be successfully extended into other applications or data sets. (p. 437)
79 sideways market (p. 443) A sideways market exhibits volatility without a persistent direction. (p. 443)
80 simple moving average (p. 438) The most basic approach uses a simple moving average, a simple arithmetic average of previous prices. (p. 438)
81 slippage (p. 436) Slippage is the unfavorable difference between assumed entry and exit prices and the entry and exit prices experienced in practice. (p. 436)
82 systematic fund trading (p. 423) Systematic fund trading, often referred to as black-box model trading because the details are hidden in complex software, occurs when the ongoing trading decisions of the investment process are automatically generated by computer programs. (p. 423)
83 technical analysis (p. 424) Technical analysis relies on data from trading activity, including past prices and volume data. (p. 424)
84 thematic investing (p. 428) Thematic investing is a trading strategy that is not based on a particular instrument or market; rather, it is based on secular and long-term changes in some fundamental economic variables or relationships—for example, trends in population, the need for alternative sources of energy, or changes in a particular region of the world economy. (p. 428)
85 transparency (p. 453) Transparency is the ability to understand the detail within an investment strategy or portfolio. (p. 453)
86 transparency risk (p. 453) Transparency risk is dispersion in economic outcomes caused by the lack of detailed information regarding an investment portfolio or strategy. (p. 453)
87 trend-following strategies (p. 438) Trend-following strategies are designed to identify and take advantage of momentum in price direction (i.e., trends in prices). (p. 438)
88 validation (p. 437) Validation of a trading rule refers to the use of new data or new methodologies to test a trading rule developed on another set of data or with another methodology. (p. 437)
89 weighted moving average (p. 440) A weighted moving average is usually formed as an unequal average, with weights arithmetically declining from most recent to most distant prices. (p. 440)
90 whipsawing (p. 442) Whipsawing is when a trader alternates between establishing long positions immediately before price declines and establishing short positions immediately before price increases and, in so doing, experiences a sequence of losses. In trend following strategies, whipsawing results from a sideways market. (p. 442)
91 activist investment strategy (p. 462) The activist investment strategy involves efforts by shareholders to use their rights, such as voting power or the threat of such power, to influence corporate governance to their financial benefit as shareholders. (p. 462)
92 agency costs (p. 466) Agency costs are any costs, explicit (e.g., monitoring and auditing costs) or implicit (e.g., excessive corporate perks), resulting from inherent conflicts of interest between shareholders as principals and managers as agents. (p. 466)
93 agency theory (p. 466) Agency theory studies the relationship between principals and agents. (p. 466)
94 agent compensation scheme (p. 466) An agent compensation scheme is all agreements and procedures specifying payments to an agent for services, or any other treatment of an agent with regard to employment. (p. 466)
95 antitrust review (p. 479) An antitrust review is a government analysis of whether a corporate merger or some other action is in violation of regulations through its potential to reduce competition. (p. 479)
96 bankruptcy process (p. 484) The bankruptcy process is the series of actions taken from the filing for bankruptcy through its resolution. (p. 484)
97 bidding contest (p. 479) A bidding contest or bidding war is when two or more firms compete to acquire the same target. (p. 479)
98 capital structure arbitrage (p. 490) Capital structure arbitrage involves offsetting positions within a company’s capital structure with the goal of being long relatively underpriced securities, being short overpriced securities, and being hedged against risk. (p. 490)
99 corporate event risk (p. 459) Corporate event risk is dispersion in economic outcomes due to uncertainty regarding corporate events. (p. 459)
100 corporate governance (p. 462) Corporate governance describes the processes and people that control the decisions of a corporation. (p. 462)
101 distressed debt hedge funds (p. 482) Distressed debt hedge funds invest in the securities of a corporation that is in bankruptcy or is likely to fall into bankruptcy. (p. 482)
102 event-driven (p. 459) The event-driven category of hedge funds includes activist hedge funds, merger arbitrage funds, and distressed securities funds, as well as special situation funds and multistrategy funds that combine a variety of event-driven strategies. (p. 459)
103 event-driven multistrategy funds (p. 495) Event-driven multistrategy funds diversify across a wide variety of event-driven strategies, participating in opportunities in both corporate debt and equity securities. (p. 495)
104 financial market segmentation (p. 491) Financial market segmentation occurs when two or more markets use different valuations for similar assets due to the lack of participants who trade in both markets or who perform arbitrage between the markets. (p. 491)
105 financing risk (p. 481) Financing risk is the economic dispersion caused by failure or potential failure of an entity, such as an acquiring firm, to secure the funding necessary to consummate a plan. (p. 481)
106 Form 13D (p. 468) In the United States, Form 13D is required to be filed with the Securities and Exchange Commission (SEC) within 10 days, publicizing an activist’s stake in a firm once the activist owns more than 5% of the firm and has a strategic plan for the firm. (p. 468)
107 Form 13F (p. 468) In the United States, Form 13F is a required quarterly filing of all long positions by all U.S. asset managers with over $100 million in assets under management, including hedge funds and mutual funds, among other investors. (p. 468)
108 Form 13G (p. 468) In the United States, Form 13G is required of passive shareholders who buy a 5% stake in a firm, but this filing may be delayed until 45 days after year-end. (p. 468)
109 free rider (p. 465) A free rider is a person or entity that allows others to pay initial costs and then benefits from those expenditures. (p. 465)
110 interlocking boards (p. 469) Interlocking boards occur when board members from multiple firms—especially managers—simultaneously serve on each other’s boards and may lead to a reduced responsiveness to the interests of shareholders. (p. 469)
111 liquidation process (p. 484) In a liquidation process (chapter 7 in U.S. bankruptcy laws), all of the assets of the firm are sold, and the cash proceeds are distributed to creditors. (p. 484)
112 long binary call option (p. 460) A long binary call option makes one payout when the referenced price exceeds the strike price at expiration and a lower payout or no payout in all other cases. (p. 460)
113 long binary put option (p. 461) A long binary put option makes one payout when the referenced price is lower than the strike price at expiration and a lower payout or no payout in all other cases. (p. 461)
114 merger arbitrage (p. 473) Merger arbitrage attempts to benefit from merger activity with minimal risk and is perhaps the best-known event-driven strategy. (p. 473)
115 one-off transaction (p. 486) A one-off transaction has one or more unique characteristics that cause the transaction to require specialized skill, knowledge, or effort. (p. 486)
116 principal-agent relationship (p. 466) A principal-agent relationship is any relationship in which one person or group, the principal(s), hires another person or group, the agent(s), to perform decision-making tasks. (p. 466)
117 proxy battle (p. 463) A proxy battle is a fight between the firm’s current management and one or more shareholder activists to obtain proxies (i.e., favorable votes) from shareholders. (p. 463)
118 recovery value (p. 488) The recovery value of the firm and its securities is the value of each security in the firm and is based on the time it will take the firm to emerge from the bankruptcy process and the condition in which it will emerge. (p. 488)
119 reorganization process (p. 484) In a reorganization process (chapter 11 in U.S. bankruptcy laws), the firm’s activities are preserved. (p. 484)
120 selling insurance (p. 460) Selling insurance in this context refers to the economic process of earning relatively small returns for providing protection against risks, not the literal process of offering traditional insurance policies. (p. 460)
121 shareholder activism (p. 463) Shareholder activism refers to efforts by one or more shareholders to influence the decisions of a firm in a direction contrary to the initial recommendations of the firm’s senior management. (p. 463)
122 special situation funds (p. 495) Special situation funds also invest across a number of event styles are typically focused on equity securities, especially those with a spin-off or recent emergence from bankruptcy. (p. 495)
123 spin-off (p. 472) A spin-off occurs when a publicly traded firm splits into two publicly traded firms, with shareholders in the original firm becoming shareholders in both firms. (p. 472)
124 split-off (p. 472) A split-off occurs when investors have a choice to own Company A or B, as they are required to exchange their shares in the parent firm if they would like to own shares in the newly created firm. (p. 472)
125 staggered board seats (p. 469) Staggered board seats exist when instead of having all members of a board elected at a single point in time, portions of the board are elected at regular intervals. (p. 469)
126 stock-for-stock mergers (p. 475) Stock-for-stock mergers acquire stock in the target firm using the stock of the acquirer and typically generate large initial increases in the share price of the target firm. (p. 475)
127 toehold (p. 468) A toehold is a stake in a potential merger target that is accumulated by a potential acquirer prior to the news of the merger attempt becoming widely known. (p. 468)
128 traditional merger arbitrage (p. 475) Traditional merger arbitrage generally uses leverage to buy the stock of the firm that is to be acquired and to sell short the stock of the firm that is the acquirer. (p. 475)
129 wolf pack (p. 468) A wolf pack is a group of investors who may take similar positions to benefit from an activists’ engagement with corporate management. (p. 468)
130 anticipated volatility (p. 518) Anticipated volatility is the future level of volatility expected by a market participant. (p. 518)
131 asset-backed securities (p. 537) Still another subset of fixed-income arbitrage trades is asset- backed securities (ABS), which are securitized products created from pools of underlying loans or other assets. (p. 537)
132 busted convertibles (p. 502) Bonds with very high conversion premiums are often called busted convertibles, as the embedded stock options are far out-of-the-money. (p. 502)
133 carry trades (p. 534) Carry trades attempt to earn profits from carrying or maintaining long positions in higher-yielding assets and short positions in lower-yielding assets without suffering from adverse price movements. (p. 534)
134 classic convertible bond arbitrage trade (p. 500) The classic convertible bond arbitrage trade is to purchase a convertible bond that is believed to be undervalued and to hedge its risk using a short position in the underlying equity. (p. 500)
135 classic dispersion trade (p. 526) The classic dispersion trade is a market-neutral short correlation trade, popular among volatility arbitrage practitioners, that typically takes long positions in options listed on the equities of single companies and short positions in a related index option. (p. 526)
136 classic relative value strategy trade (p. 499) The classic relative value strategy trade is based on the premise that a particular relationship or spread between two prices or rates has reached an abnormal level and will therefore tend to return to its normal level. (p. 499)
137 complexity premium (p. 507) A complexity premium is a higher expected return offered by a security to an investor to compensate for analyzing and managing a position that requires added time and expertise. (p. 507)
138 components of convertible arbitrage returns (p. 509) The components of convertible arbitrage returns include interest, dividends, rebates, and capital gains and losses. (p. 509)
139 convergence (p. 499) Convergence is the return of prices or rates to relative values that are deemed normal. (p. 499)
140 convertible bonds (p. 500) Convertible bonds are hybrid corporate securities, mixing fixed-income and equity characteristics into one security. (p. 500)
141 correlation risk (p. 523) Correlation risk is dispersion in economic outcomes attributable to changes in realized or anticipated levels of correlation between market prices or rates. (p. 523)
142 correlations go to one (p. 526) The term correlations go to one means that during periods of enormous stress, stocks and bonds with credit risk decline simultaneously and with somewhat similar magnitudes. (p. 526)
143 delta (p. 502) Delta is the change in the value of an option (or a security with an implicit option) with respect to a change in the value of the underlying asset (i.e., it measures the sensitivity of the option price to small changes in the price of its underlying asset). (p. 502)
144 delta-neutral (p. 504) A delta-neutral position is a position in which the value- weighted sum of all deltas of all positions equals zero. (p. 504)
145 dilution (p. 508) Dilution takes place when additional equity is issued at below- market values, and the per-share value of the holdings of existing shareholders is diminished. (p. 508)
146 duration (p. 533) Duration is a measure of the sensitivity of a fixed-income security to a change in the general level of interest rates. (p. 533)
147 duration-neutral (p. 535) A duration-neutral position is a portfolio in which the aggregated durations of the short positions equal the aggregated durations of the long positions weighted by value. (p. 535)
148 dynamic delta hedging (p. 512) Dynamic delta hedging is the process of frequently adjusting positions in order to maintain a target exposure to delta, often delta neutrality. (p. 512)
149 effective duration (p. 537) Effective duration is a measure of the interest rate sensitivity of a position that includes the effects of embedded option characteristics. (p. 537)
150 equity-like convertible (p. 502) An equity-like convertible is a convertible bond that is far in- the-money and therefore has a price that tracks its underlying equity very closely. (p. 502)
151 fixed-income arbitrage (p. 532) Fixed-income arbitrage involves simultaneous long and short positions in fixed income securities with the expectation that over the investment holding period, the security prices will converge toward a similar valuation standard. (p. 532)
152 gamma (p. 503) Gamma is the second derivative of an option’s price with respect to the price of the underlying asset—or, equivalently, the first derivative of delta with respect to the price of the underlying asset. (p. 503)
153 general collateral stocks (p. 506) General collateral stocks, which are stocks not facing heavy borrowing demand, may earn a 2% rebate when Treasury bill rates are at 2%, whereas stocks on special may earn zero rebates or even negative rebates, wherein borrowers must pay the lenders money in addition to the interest that the lender is earning on the collateral. (p. 506)
154 hybrid convertibles (p. 502) Convertible bonds with moderately sized conversion ratios have stock options closer to being at-the-money and are called hybrid convertibles. (p. 502)
155 implied volatility (p. 505) The implied volatility of an option or an option-like position— in this case, the implied volatility of a convertible bond—is the standard deviation of returns that is viewed as being consistent with an observed market price for the option. (p. 505)
156 intercurve arbitrage positions (p. 534) There are also intercurve arbitrage positions, which means arbitrage (hedged positions) using securities related to different yield curves. (p. 534)
157 interest rate immunization (p. 535) Interest rate immunization is the process of eliminating all interest rate risk exposures. (p. 535)
158 intracurve arbitrage positions (p. 533) These are examples of intracurve arbitrage positions because they are based on hedged positions within the same yield curve. (p. 533)
159 marking-to-market (p. 522) Marking-to-market refers to the use of current market prices to value instruments, positions, portfolios, and even the balance sheets of firms. (p. 522)
160 marking-to-model (p. 522) Marking-to-model refers to valuation based on prices generated by pricing models. The pricing models generally involve two components. (p. 522)
161 modified duration (p. 536) Modified duration is equal to traditional duration divided by the quantity [1 + (y/m)], where y is the stated annual yield, m is the number of compounding periods per year, and y/m is the periodic yield. (p. 536)
162 moneyness (p. 502) Moneyness is the extent to which an option is in-the-money, at-the-money, or out-of-the-money. (p. 502)
163 mortgage-backed securities arbitrage (p. 538) Mortgage-backed securities arbitrage attempts to generate low-risk profits through the relative mispricing among MBS or between MBS and other fixed-income securities. (p. 538)
164 net delta (p. 512) The net delta of a position is the delta of long positions minus the delta of short positions. (p. 512)
165 option-adjusted spread (p. 538) A key concept in pricing fixed income securities with embedded prepayment options is the option-adjusted spread (OAS), which is a measure of the excess of the return of a fixed-income security containing an option over the yield of an otherwise comparable fixed-income security without an option after the return of the fixed-income security containing the option has been adjusted to remove the effects of the option. (p. 538)
166 parallel shift (p. 535) A parallel shift in the yield curve happens when yields of all maturities shift up or down by equal (additive) amounts. (p. 535)
167 portfolio insurance (p. 525) Portfolio insurance is any financial method, arrangement, or program for limiting losses from large adverse price movements. (p. 525)
168 price transparency (p. 522) Price transparency is information on the prices and quantities at which participants are offering to buy (bid) and sell (offer) an instrument. (p. 522)
169 pricing risk (p. 522) Pricing risk is the economic uncertainty caused by actual or potential mispricing of positions. (p. 522)
170 realized volatility (p. 505) Realized volatility is the actual observed volatility (i.e., the standard deviation of returns) experienced by an asset—in this case, the underlying stock. (p. 505)
171 rebate (p. 506) A rebate is a payment of interest to the securities’ borrower on the collateral posted. (p. 506)
172 riding the yield curve (p. 535) The process of holding a bond as its yield moves up or down the yield curve due to the passage of time is known as riding the yield curve. (p. 535)
173 rolling down (p. 535) Rolling down the yield curve is the process of experiencing decreasing yields to maturity as an asset’s maturity declines through time in an upward-sloping yield curve environment. (p. 535)
174 short correlation (p. 527) The classic dispersion trade is referred to as a short correlation trade because the trade generates profits from low levels of realized correlation and losses from high levels of realized correlation. (p. 527)
175 short squeeze (p. 507) A short squeeze occurs when holders of short positions are compelled to purchase shares at increasing prices to cover their positions due to limited liquidity. (p. 507)
176 sovereign debt (p. 534) Sovereign debt is debt issued by national governments. (p. 534)
177 special stock (p. 506) A special stock is a stock for which higher net fees are demanded when it is borrowed. (p. 506)
178 tail risk (p. 524) Tail risk is the potential for very large loss exposures due to very unusual events, especially those associated with widespread market price declines. (p. 524)
179 term structure of interest rates (p. 533) Sometimes the term structure of interest rates is distinguished from the yield curve because the yield curve plots yields to maturity of coupon bonds, whereas the term structure of interest rates plots actual or hypothetical yields of zero-coupon bonds. (p. 533)
180 theta (p. 503) Theta is the first derivative of an option’s price with respect to the time to expiration of the option. (p. 503)
181 variance notional value (p. 520) The variance notional value of the contract simply scales the size of the cash flows in a variance swap. (p. 520)
182 variance swaps (p. 520) Variance swaps are forward contracts in which one party agrees to make a cash payment to the other party based on the realized variance of a price or rate in exchange for receiving a predetermined cash flow. (p. 520)
183 vega (p. 518) Vega is a measure of the risk of a position or an asset due to changes in the volatility of a price or rate that helps determine the value of that position or asset. (p. 518)
184 vega notional value (p. 520) The vega notional value of a contract serves to scale the contract and determine the size of the payoff in a volatility swap. (p. 520)
185 vega risk (p. 518) Vega risk is the economic dispersion caused by changes in the volatility of a price, return, or rate. (p. 518)
186 volatility arbitrage (p. 518) Volatility arbitrage is any strategy that attempts to earn a superior and riskless profit based on prices that explicitly depend on volatility. (p. 518)
187 volatility risk (p. 523) Volatility risk is dispersion in economic outcomes attributable to changes in realized or anticipated levels of volatility in a market price or rate. (p. 523)
188 volatility swap (p. 520) A volatility swap mirrors a variance swap except that the payoff of the contract is linearly based on the standard deviation of a return series rather than the variance. (p. 520)
189 yield curve (p. 533) A yield curve is the relationship between the yields of various securities, usually depicted on the vertical axis, and the term to maturity, usually depicted on the horizontal axis. (p. 533)
190 accounting accrual (p. 553) An accounting accrual is the recognition of a value based on anticipation of a transaction. (p. 553)
191 asynchronous trading (p. 550) Asynchronous trading is an example of market inefficiency in which news affecting more than one stock may be assimilated into the price of the stocks at different speeds. (p. 550)
192 breadth (p. 558) The breadth of a strategy is the number of independent active bets placed into an active portfolio. (p. 558)
193 earnings momentum (p. 555) Earnings momentum is the tendency of earnings changes to be positively correlated. (p. 555)
194 earnings surprise (p. 555) Earnings surprise is the concept and measure of the unexpectedness of an earnings announcement. (p. 555)
195 equity long/short funds (p. 547) Equity long/short funds tend to have net positive systematic risk exposure from taking a net long position, with the long positions being larger than the short positions. (p. 547)
196 equity market-neutral funds (p. 547) Equity market-neutral funds attempt to balance short and long positions, ideally matching the beta exposure of the long and short positions and leaving the fund relatively insensitive to changes in the underlying stock market index. (p. 547)
197 Fundamental Law of Active Management (FLOAM) (p. 558) Richard Grinold in 1989 proposed the Fundamental Law of Active Management (FLOAM), which identifies two key components of actively managed investment strategies: breadth and skill. (p. 558)
198 illegal insider trading (p. 557) Illegal insider trading varies by jurisdiction but may involve using material nonpublic information, such as an impending merger, for trading without required disclosure. (p. 557)
199 information coefficient (p. 558) The information coefficient (IC) measures managerial skill as the correlation between managerial return predictions and realized returns. (p. 558)
200 informationally efficient (p. 550) Markets are said to be informationally efficient when security prices reflect available information. (p. 550)
201 issuance of new stock (p. 557) Issuance of new stock is a firm’s creation of new shares of common stock in that firm and may occur as a result of a stock-for-stock merger transaction or through a secondary offering. (p. 557)
202 legal insider trading (p. 557) Trading by insiders can be legal insider trading when it is performed subject to legal restrictions. (p. 557)
203 limits to arbitrage (p. 564) The limits to arbitrage refer to the potential inability or unwillingness of speculators, such as equity hedge fund managers, to hold their positions without time constraints or to increase their positions without size constraints. (p. 564)
204 liquidity (p. 548) Liquidity in this context is the extent to which transactions can be executed with minimal disruption to prices. (p. 548)
205 market anomalies (p. 552) Investment strategies that can be identified based on available information and that offer higher expected returns after adjustment for risk are known as market anomalies, and they are violations of informational market efficiency. (p. 552)
206 market impact (p. 564) Market impact is the degree of the short-term effect of trades on the sizes and levels of bid prices and offer prices. (p. 564)
207 market maker (p. 549) A market maker is a market participant that offers liquidity, typically both on the buy side by placing bid orders and on the sell side by placing offer orders. (p. 549)
208 mean neutrality (p. 574) Mean neutrality is when a fund is shown to have zero beta exposure or correlation to the underlying market index. (p. 574)
209 multiple-factor scoring models (p. 561) Multiple-factor scoring models combine the factor scores of a number of independent anomaly signals into a single trading signal. (p. 561)
210 net stock issuance (p. 557) Net stock issuance is issuance of new stock minus share repurchases. (p. 557)
211 nonactive bets (p. 560) Nonactive bets are positions held to reduce tracking error rather than to serve as return-enhancing active bets. (p. 560)
212 overreacting (p. 550) Another potential source of abnormal profits for hedge funds is overreacting in which short-term price changes are too large relative to the value changes that should occur in a market with perfect informational efficiency. (p. 550)
213 pairs trading (p. 562) Pairs trading is a strategy of constructing a portfolio with matching stocks in terms of systematic risks but with a long position in the stock perceived to be relatively underpriced and a short position in the stock perceived to be relatively overpriced. (p. 562)
214 post-earnings-announcement drift (p. 556) A post-earnings-announcement drift anomaly has been documented, in which investors can profit from positive surprises by buying immediately after the earnings announcement or selling short immediately after a negative earnings surprise. (p. 556)
215 price momentum (p. 554) Price momentum is trending in prices such that an upward price movement indicates a higher expected price and a downward price movement indicates a lower expected price. (p. 554)
216 providing liquidity (p. 548) Providing liquidity refers to the placement of limit orders or other actions that increase the number of shares available to be bought or sold near the current best bid and offer prices. (p. 548)
217 share buyback program (p. 556) When a company chooses to reduce its shares outstanding, a share buyback program is initiated, and the company purchases its own shares from investors in the open market or through a tender offer. (p. 556)
218 short interest (p. 550) Short interest is the percentage of outstanding shares that are currently held short. (p. 550)
219 short-bias funds (p. 547) Short-bias funds have larger short positions than long positions, leaving a persistent net short position relative to the market index that allows these funds to profit during times of declining equity prices. (p. 547)
220 speculation (p. 551) Speculation is defined as bearing abnormal risk in anticipation of abnormally high expected returns. (p. 551)
221 standardized unexpected earnings (p. 556) Standardized unexpected earnings (SUE) is a measure of earnings surprise. (p. 556)
222 taking liquidity (p. 548) More generally, taking liquidity refers to the execution of market orders by a market participant to meet portfolio preferences that cause a decrease in the supply of limit orders immediately near the current best bid and offer prices. (p. 548)
223 test of joint hypotheses (p. 552) An empirical test of market efficiency is a test of joint hypotheses, because the test assumes the validity of a model of the risk-return relationship to test whether a given trading strategy earns consistent risk-adjusted profits. (p. 552)
224 underreacting (p. 550) Another potential source of abnormal profits for hedge funds is underreacting in which short-term price changes are too small relative to the value changes that should occur in a market with perfect informational efficiency. (p. 550)
225 uptick rule (p. 567) An uptick rule permits short sellers to enter a short sale only at a price that is equal to or higher than the previous transaction price of the stock. (p. 567)
226 variance neutrality (p. 574) Variance neutrality is when fund returns are uncorrelated to changes in market risk, including extreme risks in crisis market scenarios. (p. 574)
227 access (p. 594) Access is an investor’s ability to place new or increased money in a particular fund. (p. 594)
228 conservative funds of funds (p. 604) Conservative funds of funds have underlying hedged positions. (p. 604)
229 diversified funds of funds (p. 604) Diversified funds of funds represent a broad mix of funds. (p. 604)
230 fee netting (p. 592) Fee netting in the case of a multistrategy fund is when the investor pays incentive fees based only on net profits of the combined strategies, rather than on all profitable strategies. (p. 592)
231 liquidity facility (p. 595) A liquidity facility is a standby agreement with a major bank to provide temporary cash for specified needs with pre- specified conditions. (p. 595)
232 market-defensive funds of funds (p. 604) Market-defensive funds of funds tend to have underlying and unhedged short positions. (p. 604)
233 nontraditional bond funds (p. 602) Nontraditional or unconstrained bond funds do not simply take long positions in investment-grade sovereign and credit securities, but may also invest in high-yield or emerging markets debt, often including leverage and short positions. (p. 602)
234 operational due diligence (p. 586) Operational due diligence is the process of evaluating the policies, procedures, and internal controls of an asset management organization. (p. 586)
235 seeding funds (p. 597) Seeding funds, or seeders, are funds of funds that invest in newly created individual hedge funds, often taking an equity stake in the management companies of the newly minted hedge funds. (p. 597)
236 strategic funds of funds (p. 604) Strategic funds of funds tend to have underlying directional bets. (p. 604)
237 unconstrained bond funds (p. 602) Nontraditional or unconstrained bond funds do not simply take long positions in investment-grade sovereign and credit securities, but may also invest in high-yield or emerging markets debt, often including leverage and short positions. (p. 602)