Glossary

A situation where internal and/or external forces prevent market equilibrium from being reached or cause the market to fall out of balance. This can be a short-term byproduct of a change in variable factors or a result of long-term structural imbalances. This theory was originally put forth by economist John Maynard Keynes.

Many modern economists have likened using the term "general disequilibrium" to describe the state of the markets as we most often find them. Keynes noted that markets will most often be in some form of disequilibrium - there are so many variable factors that affect financial markets today that true equilibrium is more of an idea; it is helpful for creating working models, but lacks real-world validation.

Distressed Securities strategies invest in, and may sell short, the securities of companies where the security´s price has been, or is expected to be, affected by a distressed situation. This may involve reorganizations, bankruptcies, distressed sales and other corporate restructurings. Depending on the manager´s style, investments may be made in bank debt, corporate debt, trade claims, common stock, preferred stock and warrants. Strategies may be sub-categorized as "high-yield" or "orphan equities." Some managers may use leverage. Fund managers may run a market hedge using S&P put options or put option spreads.

This report displays the number of months in which a trading program´s monthly performance historically has fallen within varying performance increments.

An investment is said to be in a drawdown when its price falls below its last peak .The drawdown percentage drop in the price of an investment from its last peak price. The period between the peak level and the trough is called the length of the drawdown period between the trough and the recapturing of the peak is called the recovery. The worst or maximum drawdown represents the greatest peak to trough decline over the life of an investment.

A drawdown is defined as a loss of equity from a peak to valley in a single month or period of consecutive months.

The Drawdown Report presents data on the percentage drawdown´s during the trading program´s performance history ranked in order of magnitude of loss.

Depth: Percentage loss from peak to valley

Length: Duration of drawdown in months from peak to valley

Recovery: Number of months from valley to new high

Start Date: Month in which peak occurs.

End Date: Month in which valley occurs.

A cash flow calculation that takes the present value of all asset cash flows and subtracts the present value of all liability cash flows. This calculation is used by banks for asset/liability management. The value of a bank´s assets and liabilities are directly linked to interest rates. By calculating its EVE, a bank is able to construct models that show the effect of different interest rate changes on its total capital. This risk analysis is a key tool that allows banks to prepare against constantly changing interest rates.

This is a ratio calculated by dividing the annual return by the annualized monthly standard deviation.

Emerging Markets funds invest in securities of companies, or the sovereign debt of developing or "emerging" countries. Investments are primarily long. "Emerging Markets" include countries in Latin America, Eastern Europe, the former Soviet Union, Africa and parts of Asia. Emerging Markets - Global funds will shift their weightings among these regions according to market conditions and manager perspectives. In addition, some managers invest solely in individual regions.

Emerging Markets - Asia involves investing in the emerging markets of Asia.

Emerging Markets - Eastern Europe/CIS funds concentrate their investment activities in the nations of Eastern Europe and the CIS (the former Soviet Union).

Emerging Markets - Latin America is a strategy that entails investing throughout Central and South America.

Equity Hedge investing consists of a core holding of long equities hedged at all times with short sales of stocks and/or stock index options. Some managers maintain a substantial portion of assets within a hedged structure and commonly employ leverage. Where short sales are used, hedged assets may be comprised of an equal dollar value of long and short stock positions. Other variations use short sales unrelated to long holdings and/or puts on the S&P index and put spreads. Conservative funds mitigate market risk by maintaining market exposure from zero to 100 percent. Aggressive funds may magnify market risk by exceeding 100 percent exposure and, in some instances, maintain a short exposure. In addition to equities, some funds may have limited assets invested in other types of securities.

Equity Market Neutral investing seeks to profit by exploiting pricing inefficiencies between related equity securities, neutralizing exposure to market risk by combining long and short positions. Typically, the strategy is based on quantitative models for selecting specific stocks with equal dollar amounts comprising the long and short sides of the portfolio. One example of this strategy is to build portfolios made up of long positions in the strongest companies in several industries and taking corresponding short positions in those showing signs of weakness. Another variation is investing long stocks and selling short index futures.

Equity Non-Hedge funds are predominately long equities, although they have the ability to hedge with short sales of stocks and/or stock index options. These funds are commonly known as "stock-pickers." Some funds employ leverage to enhance returns. When market conditions warrant, managers may implement a hedge in the portfolio. Funds may also opportunistically short individual stocks. The important distinction between equity non-hedge funds and equity hedge funds is equity non-hedge funds do not always have a hedge in place. In addition to equities, some funds may have limited assets invested in other types of securities.

Event-Driven is also known as "corporate life cycle" investing. This involves investing in opportunities created by significant transactional events, such as spin-offs, mergers and acquisitions, bankruptcy reorganizations, recapitalizations and share buybacks. The portfolio of some Event-Driven managers may shift in majority weighting between Risk Arbitrage and Distressed Securities, while others may take a broader scope. Instruments include long and short common and preferred stocks, as well as debt securities and options. Leverage may be used by some managers. Fund managers may hedge against market risk by purchasing S&P put options or put option spreads

A theory describing the long-run relationship between inflation and interest rates. This equation tells us that, all things being equal, a rise in a country´s expected inflation rate will eventually cause an equal rise in the interest rate (and vice versa).

Fixed Income Arbitrage is a market neutral hedging strategy that seeks to profit by exploiting pricing inefficiencies between related fixed income securities while neutralizing exposure to interest rate risk. Fixed Income Arbitrage is a generic description of a variety of strategies involving investment in fixed income instruments, and weighted in an attempt to eliminate or reduce exposure to changes in the yield curve. Managers attempt to exploit relative mispricing between related sets of fixed income securities. The generic types of fixed income hedging trades include: yield-curve arbitrage, corporate versus Treasury yield spreads, municipal bond versus Treasury yield spreads and cash versus futures.

Fixed Income Convertible Bond funds are primarily long only convertible bonds. Convertible bonds have both fixed income and equity characteristics. If the underlying common stock appreciates, the convertible bond´s value should rise to reflect this increased value. Downside protection is offered because if the underlying common stock declines, the convertible bond´s value can decline only to the point where it behaves like a straight bond.

Fixed income High-Yield managers invest in non-investment grade debt. Objectives may range from current income to acquisition of undervalued instruments. Emphasis is placed on assessing credit risk of the issuer. Some of the available high-yield instruments include extendible/reset securities, increasing-rate notes, pay-in-kind securities, split-coupon securities and usable bonds.

Fixed income Diversified fund may invest in a variety of fixed income strategies. While many invest in multiple strategies, others may focus on a single strategy less followed by most fixed income hedge funds. Areas of focus include municipal bonds, corporate bonds, and global fixed income securities.

Fixed Income Mortgage Backed funds invest in mortgage-backed securities. Many funds focus solely on AAA-rated bonds. Instruments include: government agency, government-sponsored enterprise, private label fixed- or adjustable-rate mortgage pass-through securities, fixed- or adjustable-rate collateralized mortgage obligations (CMO´s), real estate mortgage investment conduits (REMICs) and stripped mortgage-backed securities (SMBSs). Funds may look to capitalize on security-specific mispricings. Hedging of prepayment risk and interest rate risk is common. Leverage may be used, as well as futures, short sales and options.

The underlying proposition of fundamental analysis is that there is a basic intrinsic value for the aggregate stock market, various industries or individual securities and that these depend on underlying economic factors. The identification and analysis of relevant variables combined with the ability to quantify the future value of these variables are key to achieving superior investment results. A wide range of financial information is evaluated in fundamental analysis, including such income statement data as sales, operating costs, pre-tax profit margin, net profit margin, return on equity, cash flow, and earnings per share.

Fundamental analysis contrasts with technical analysis which contends that the prices for individual securities and the overall value of the market tend to move in trends that persist.

A future is a derivative instrument that involves a contract to buy or sell an asset (stock index, commodity, currency, fixed income or other security) for delivery at a future date at a specific price.

An individual or organization which solicits or accepts orders to buy or sell futures contracts or commodity options and accepts money or other assets from customers in connection with such orders. An FCM must be registered with the CFTC

A legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. The only variable is price.

The national trade association in the United States of America for Futures Commission Merchants.

In finance, gearing (or leverage) is using given resources in such a way that the potential positive or negative outcome is magnified. It generally refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity.

A requirement that the fund must recoup any prior losses before the investment manager may take a performance (incentive) fee. In addition to performance losses, prior losses may include any combination of fees that the investment manager charges, such as management and administrative fees.

The level of return (often the risk-free interest rate) which investment managers sometimes stipulate net new highs must exceed in order for performance fees to be charged.

Fee paid as an incentive to the general partner of a hedge fund or a Commodity Trading Advisor, the amount of which depends on his/her performance, usually relative to some benchmark index. Such a form of compensation could in fact extend to any financial professional, but tends to be most common among people directly responsible for managing funds.

A portfolio that delivers an expected return that is too low for the amount of risk it requires, or equivalently, a portfolio that requires too much risk for a given expected return.

Internal Rate of Return. The rate of return that would make the present value of future cash flows plus the final market value of an investment or business opportunity equal the current market price of the investment or opportunity.