Glossary

Definition 1
The actual value of a security, as opposed to its market price or book value. The intrinsic value includes other variables such as brand name, trademarks, and copyrights that are often difficult to calculate and sometimes not accurately reflected in the market price. One way to look at it is that the market capitalization is the price (i.e. what investors are willing to pay for the company) and intrinsic value is the value (i.e. what the company is really worth). Different investors use different techniques to calculate intrinsic value.

Definition 2
The amount by which a call option is in the money, calculated by taking the difference between the strike price and the market price of the underlier. For example, if a call option for 100 shares has a strike price of $35 and the stock is trading at $50 a share than the call option has an intrinsic value> of $15 share, or $1500. If the stock price is less than the strike price the call option has no intrinsic value.

Definition 3
The amount by which a put option is in the money, calculated by taking the difference between the strike price and the market price of the underlier. For example, if a put option for 100 shares has a strike price of $35 and the stock is trading at $20 a share than the put option has an intrinsic value of $15 per share, or $1500. If the stock price is greater than the strike price the put option has no intrinsic value

An investor´s plan of distributing assets among various investments, taking into consideration such factors as individual goals, risk tolerance and horizon.

Kurtosis characterizes the relative peakedness or flatness of a distribution compared with the normal distribution. Positive kurtosis indicates relatively peaked distribution. Negative kurtosis indicates relatively flat distribution.

Leverage and gearing effectively mean the same thing: the process or effect of ´gearing up´ or magnifying exposure to an investment strategy, manager or asset. Leverage can be achieved by borrowing capital or using derivatives . A leveraged investment is subject to a multiplied effect in the profit or loss resulting from a comparatively small change in price. Thus leverage offers the opportunity to achieve enhanced returns, but at the same time can result in a loss that is proportionally greater than the amount invested.

A time period during which a new investor in a fund may not withdraw any capital committed to the fund.

Macro involves investing by making leveraged bets on anticipated price movements of stock markets, interest rates, foreign exchange and physical commodities. Macro managers employ a "top down" global approach, and may invest in any markets using any instruments to participate in expected market movements. These movements may result from forecasted shifts in world economies, political fortunes or global supply and demand for resources, both physical and financial. Exchange traded and over-the-counter derivatives are often used to magnify these price movements.

The segment of the alternative investment industry which actively trades and manages futures instruments. The advisers that focus their asset management efforts on futures are known as CTAs (Commodity trading Advisors) They invest on both the long and short side of the market and usually employ quantitative or technical analysis and systematic investment processes.

The amount of capital that has to be deposited as collateral in order to gain full exposure to an asset.

To debit or credit on a daily basis a margin account based on the close of that day´s trading session. In this way, buyers and sellers are protected against the possibility of contract default.

Denotes an approach to investment where the emphasis is on the value of securities relative to each other and the use of arbitrage techniques, rather than market direction forecasting. By emphasizing the relative value of securities and the exploitation of pricing anomalies between related securities, practitioners of market neutral approaches aim to generate profits regardless of the overall direction of broad market prices. Market neutrality is generally achieved by offsetting or hedging long and short positions or maintaining balanced exposure in the market. The term market neutral can be applied with some justification to the majority of alternative investment styles because of their ability to capitalize both on upward or downward price moves or to profit in a wide range of market environments.

Market Timing involves allocating assets among investments by switching into investments that appear to be beginning an uptrend, and switching out of investments that appear to be starting a downtrend. This primarily consists of switching between mutual funds and money market funds. Typically, trend following indicators are used to determine the direction of a fund and to identify buy and sell signals. In an up move "buy signal," money is transferred from a money market fund into a mutual fund in an attempt to capture a capital gain. In a down move "sell signal," the assets in the mutual fund are sold and moved back into the money market fund for safe keeping until the next up move. The goal is to avoid being invested in mutual funds during a market decline.

Merger Arbitrage, sometimes called Risk Arbitrage, involves investment in event-driven situations such as leveraged buyouts, mergers and hostile takeovers. Normally, the stock of an acquisition target appreciates while the acquiring company´s stock decreases in value. These strategies generate returns by purchasing the stock of the company being acquired, and in some instances, selling short the stock of the acquiring company.

Managers may employ the use of equity options as a low-risk alternative to the outright purchase or sale of common stock. Most Merger Arbitrage funds hedge against market risk by purchasing S&P put options or put option spreads.

A mathematical technique used to model the price characteristics of an investment structure based on random simulations of the underlying assets or variables that affect the price of that investment. In the context of the modeling carried out at Man, the analysis involves constructing multiple NAV paths for a product, net of all appropriate fees and interest, using random samples of gross monthly returns. The price characteristics that can be modeled using this powerful technique are known as ´path-dependent´ characteristics, such as risk, return, and drawdown´s, which depend on NAV movements over the life of an investment structure.

The speed of price change over a period of time. Momentum based investment styles, notably trend following approaches, aim to capitalize on the acceleration in directional price movements, be they upward or downward.

Authorized by Congress in 1974 and designated by the CFTC in 1982 as a "registered futures association," NFA is the industry wide self-regulatory organization of the futures industry.

NIBA is a non-profit organization for guaranteed and independent introducing brokers.

Negative gearing is a form of financial leverage where an investor borrows money to buy an asset, but the income generated by that asset does not cover the interest on the loan. (When the income does cover the interest it is called positive gearing.)A negative gearing strategy can only make a profit if the asset rises in value by enough to cover the shortfall between the income and interest which the investor suffers. The investor must also be able to fund that shortfall until the asset is sold. The taxation treatment of interest expenses and future gain will affect the investor´s final return too. Tax rules vary from country to country. Negative gearing on property is only found in Canada, Australia, and New Zealand.

A net new high is reached when the net asset value of an investment exceeds the previous peak level in the net asset value (also known as the ´high watermark´). Performance fees are levied on net new highs.

The value of each unit of participation in a commodity pool. Basically a calculation of assets minus liabilities plus or minus the value of open positions when marked to the market, divided by the total number of outstanding units.

Notional funding is the term used for funding an account below its nominal value. For example, assume a CTA requires a minimum investment of $1,000,000 (the "Nominal Value") and the margin requirement is $50,000.

The investor can either deposit $1,000,000 to "fully fund" that minimum investment requirement or she can invest only a portion of the $1,000,000, as long as she meets the $50,000 margin requirement. Now assume that the investor decides to fund the $1,000,000 account with $100,000 (the "Funding Level"). This means that the investor is using leverage of 10X-ten times $100,000 equals the $1,000,000 minimum investment. The difference between the Nominal Value ($1,000,000) and the Funding Level ($100,000) is $900,000. The $900,000 is referred to as "Notional Funding".

These are total probability weighted gains / losses. The steeper the curve is, the less the possibility of extreme returns (risky distribution is flatter). The function is equivalent to the return distribution itself, as it combines effect of all of its moments. Returns are distributed into loss and gain above and below a return threshold and then the probability weighted ratio of returns above and below a threshold is considered.

A product that is permanently open for investment. New units (shares, bonds, units) are created or dissolved as required. Investors can subscribe (buy) or redeem (sell) these units at the prevailing net asset value per unit in accordance with the details set out in the relevant product prospectus.

A derivative instrument that gives the holder the right, but without any obligation, to buy (call) or sell (put) a security or asset at a fixed price within a specified period or at a particular future date.

Often referred to as an incentive fee, this is the fee earned by a manager on profits that surpass the previous high watermark - the peak level in the net asset value of an investment since inception. The calculation of performance fees is sometimes based on that portion of the new highs which exceeds a hurdle rate such as the risk-free interest rate.

By plotting the intersection of risk and reward for different investments or weightings of assets, one can generate a risk/reward curve or ´frontier´ for those investments. The efficient frontier is the point on such curve where an investment combination delivers the most favorable balance of risk and reward.

An arrangement or mechanism built into an investment product whereby investors are assured that their initial or investment is secure and that this amount will at the very least be returned to them when such a product reaches its maturity date. Principal protection features can take a variety of forms, including capital guarantees provided by banks.

A representation of a track record that is developed to show the effect on actual performance of intended or potential adjustments for different fee structures, portfolio allocations or other variations in the investment structure upon which the original track record is based. It is important to note that a proforma is based on actual trading results and differs from a simulation, which models the hypothetical performance of a portfolio or investment approach that has yet to be applied or implemented in actual trading.

Analysis that uses subjective judgment to evaluate securities based on non-financial information such as management expertise, cyclicality of industry, strength of research and development, labor relations and depth of operational infrastructure. Qualitative analysis evaluates important factors that cannot be precisely measured rather than the actual financial data about a company.

Quantitative analysis uses statistical techniques to develop investment models using key financial ratios and economic indicators. The use of objective data facilitates the comparison of a large universe of securities to identify a select range of potential investment possibilities. Quantitative analysis deals with measurable factors in contrast from qualitative considerations such as the character of management.