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Absolute return

A common term in the hedge fund industry, absolute returns are synonymous with positive returns. Hedge funds target absolute returns versus mutual funds which target returns relative to a benchmark.

Accredited Investor

A term used by provincial and territorial securities regulatory bodies to define financially sophisticated investors that can purchase hedge funds and other exempt securities for lower minimums than other investors. Typically, individual accredited investors must have a liquid net worth of $1 million or earn income of $200,000 in each of the previous two years or earn a combined $300,000 income in conjunction with their spouse.

Active management

Investment strategy that actively manages a portfolio with the objective of producing returns in excess of a specified benchmark.

Administrator

Processes subscriptions and redemptions and calculates the value of the investors' holdings, either as a NAV or as a partnership share ¾ and usually looks after other back-office needs such as fund accounting and unitholder records.

Alpha

Alpha (Α) is a measure of "excess return" (a fund's performance over and above the market's rate of return). As such, it represents the value-added return that can be attributed to the hedge fund manager's actions rather than to the performance of the market overall.

Alternative asset class

A term commonly used to refer to non-traditional assets (versus traditional assets like stocks, bonds and cash) such as hedge funds, managed futures, real estate, private equity and collectibles (such as art, coins, wine, etc). The diversification benefits of adding alternative investments to traditional portfolios are due to the low correlation of alternative investments to traditional investments.

Alternative investment strategies (AIS)

Portfolio management strategies that invest in alternative asset classes.

Annualized return

Converts a rate of return to an annual basis.

Annualized Sharpe ratio

See Sharpe ratio.

Annualized standard deviation

See Standard deviation.

Arbitrage

Arbitrage is the market-neutral buying and selling of a security to take advantage of price discrepancies in different markets. However, the definition has broadened from the same security to securities that have similarities ¾ for example, an arbitrageur might construct a hedge by buying a company's convertible bond and shorting the same firm's common stock.

Asset allocation

An investment process whereby the total portfolio assets are divided among traditional assets (such as stocks, bonds and cash) and alternative assets (such as hedge funds, managed futures, real estate, private equity and collectibles) in an effort to reduce overall portfolio risk and improve risk-adjusted returns through portfolio diversification. This is achieved by adding lowly correlated assets together and is the basis of Modern Portfolio Theory.

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