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This glossary focuses on phrases and terminology commonly used in the world of alternative investments. It is not meant to be an all-encompassing investment dictionary, but rather a tool to enhance understanding of alternative investments.
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Kiwi
Slang for the New Zealand dollar.
Kurtosis
The kurtosis is the fourth moment about the mean divided by the square of the variance. It is a nondimensional quantity which measures the relative "peakedness" or flatness of a distribution, relative to a normal distribution. A distribution with positive kurtosis is called leptokurtic; a distribution with negative kurtosis is called platykurtic. An in-between distribution is called mesokurtic. Kurtosis is a measure of how outlier-prone e kurtosis of the nora distribution is. Thmal distribution is 3. Distributions that are more outlier-prone than the normal distribution have kurtosis greater than 3; distributions that are less outlier-prone have kurtosis less than 3.
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Lambda
The ratio of a change in the option price to a small change in the option volatility. It is the partial derivative of the option price with respect to the option volatility.
Large Order Execution (LOX) Procedures
Rules in place at the Chicago Mercantile Exchange that authorize a member firm which receives a large order from an initiating party to solicit counterparty interest off the exchange floor prior to open execution of the order in the pit and that provide for special surveillance procedures. The parties determine a maximum quantity and an "intended execution price". Subsequently, the initiating party's order quantity is exposed to the pit; any bids (or offers) up to and including those at the intended execution price are hit (acceptable). The unexecuted balance is then crossed with the contraside trader found using the LOX procedures.
Last Notice Day
The final day on which notices of intent to deliver on futures contracts may be issued.
Last Trading Day
According to the Chicago Board of Trade rules, the final day when trading may occur in a given futures
or options contract month. Futures contracts outstanding at the end of the last trading day must be settled by delivery of the underlying commodity or securities or by agreement for monetary settlement (in some cases by EFPs).
Leading Indicators
Statistics that are considered to predict future economic activity.
Leaps
Long-dated, exchange-traded options.
Leverage
When investors borrow funds to increase the amount that they have invested in a particular position, they use leverage. Investors use leverage when they believe that the return from the position will exceed the cost of the borrowed funds. Sometimes, managers use leverage to enable them to take on new positions without having to liquidate other positions prematurely. Leverage can effectively increase the potential for higher capital gain returns on investment capital, but can also increase the risk of greater capital loss.
LIBOR
The London Inter-Bank Offered Rate. Banks use LIBOR when borrowing from another bank.
Limit Order
An order with restrictions on the maximum price to be paid or the minimum price to be received. As an example, if the current price of USD/YEN is 117.00/05, then a limit order to buy USD would be at a price below 102. (ie 116.50)
Limited Liability Company (LLC)
An alternative structure to a limited partnership. It is often described as a hybrid between a corporation and a partnership because it offers limited liability like a corporation and single taxation on income like a partnership.
Limited Partner
An investor in a limited partnership. Limited partners provide the capital, but have not direct involvement in the management of the fund. Limited partners have limited liability but also have limited control over the management of the fund.
Limited Partnership
The most common format used in structuring private equity investments. Limited partners provide the capital, but have no direct involvement in the management of the fund. Limited Partners have limited liability but also have limited control over the management of the fund.
Linkage
The ability to buy (sell) contracts on one exchange (such as the Chicago Mercantile Exchange) and later sell (buy) them on another exchange (such as the Singapore International Monetary Exchange)
Liquidation
The closing of an existing position through the execution of an offsetting transaction.
Liquidity
The ability to dissolve positions on demand. Many hedge funds may not want to or may not be able to dissolve positions on demand. Redemptions are normally limited to once a week, once a month, or even longer periods.
Locked-In
A hedged position that cannot be lifted without offsetting both sides of the hedge. Also refers to being caught in a limit price move.
Long position
A position that appreciates in value if market prices increase. When the base currency in the pair is bought, the position is said to be long.
Long/Short Equity
Sometimes referred to as equity hedged. The manager uses a combination of long and short positions
in stocks to reduce market risk and focus on identifying individual stocks to buy or sell. Managers will generally be proactive in varying their "net" long position based on the market outlook. They may also raise cash to protect capital. Manager skill impacts the level of market risk (longs less shorts) total exposure (longs plus shorts) and selection of individual securities. Managers usually use fundamental analysis and may have a style bias. They will usually focus on one geographical area. Managers often invest significantly in the mid and small cap areas, which tend to be more inefficient than the large capitalization equity area.
Longest Losing Streak
The number of consecutive months a fund has had negative performance.
Long the Basis
A person or firm that has bought the spot commodity and hedged with a sale of futures is said to be
long the basis.
Lookback Option
An option whose payoff depends on the minimum or maximum price of the underlying asset during some portion of the life of the option.
Look-Back Provisions
Partnership provisions that allow for a review of the total profit distribution from the partnership at the end of the term. The look-back is a mechanism to recapture overpayments to the general partners if
they received more than their stated carried interest. The look-back provision requires return of any excess to the limited partners.
Loss Standard Deviation
A measure of the volatility of downside performance, this statistic calculates a mean return for only the periods with a loss and then measures the variation of only the losing periods around this loss mean.
Lot
A unit to measure the amount of the deal. The value of the deal always corresponds to an integer number of lots.
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Maintenance
A set minimum margin (per outstanding futures contract) that customer must maintain in his margin account.
Managed Futures
Represents an industry comprised of professional money managers known as commodity trading
advisors who manage client assets on a discretionary basis, using global futures markets as an investment medium.
Management Buyout (MBO)
Acquisition of a company by its existing management. The financing structure may involve a significant amount of borrowed capital, (thus resembles an LBO), or may have a more balanced debt/equity mix if equity financing is available to management.
Margin
The required equity that an investor must deposit to collateralize a position.
Margin Call
A request from a broker or dealer for additional funds or other collateral to guarantee performance on
a position that has moved against the customer.
Mark-to-Market
Process of re-evaluating all open positions with the current market prices. These new values then determine margin requirements.
Market-if-Touched (MIT) Order
An order that becomes a market order when a particular price is reached. A sell MIT is placed above the market; a buy MIT is placed below the market. Also referred to as a board order.
Market Maker
A dealer who regularly quotes both bid and ask prices and is ready to make a two-sided market for any financial instrument.
Market Risk
Exposure to changes in market prices.
Market Neutral - Arbitrage
Attempts to hedge out most market risk by taking offsetting positions, often in different securities of
the same issuer. For example, can be long convertible bonds and short the underlying issuers equity. May also use futures to hedge out interest rate risk. Focuses on obtaining returns with low or no correlation to both the equity and bond markets. These relative value strategies include fixed income arbitrage mortgage backed securities, capital structure arbitrage, and closed-end fund arbitrage.
Market Neutral - Securities Hedging
Invests equally in long and short equity portfolios generally in the same sectors of the market. Market risk is generally reduced, but effective stock analysis and stock picking is essential to obtaining meaningful results. Leverage can be used to enhance returns. Usually low or no correlation to the market. Sometimes uses market index futures to hedge out systematic (market) risk. Relative
benchmark index usually T-bills.
Maturity
The date for settlement or expiry of a financial instrument.
Maximum Drawdown
The worst peak to valley loss relative to the peak for the stated time period. The figure is expressed as
a percentage. Assuming that you were invested for the whole of this time period, it is the worst percentage loss that you could have experienced.
Merger Arbitrage
An investment strategy that involves investing in securities of companies that are the subject of some form of corporate transaction, including acquisition or merger proposals, cash offers and leveraged buy-outs. These transactions will generally involve the exchange of securities for cash, other securities or a combination of cash and other securities. Typically, a manager goes long the stock of a company being acquired or merging with another company, and sells short the stock of the acquiring company.
Mezzanine Debt
Privately negotiated subordinated debt investments, usually with a parallel investment in equity
securities at relatively low cost or at nominal cost. Subordinated convertible debt is often combined with preferred shares, structured with warrants or options.
Minimum Acceptable Return (MAR)
An investment return "floor" chosen by the individual investor, that serves as the dividing line between
a good and bad performance outcome. For example, if an investor is only worried about losing money, the investor's MAR would be zero and any negative returns would be viewed as risky or bad, if an investor needs to earn 7% annual return (i.e. their personal MAR) in order to meet their goals, any return under 7% would be considered risky or bad.
Mortgage Backed Securities Arbitrage
The mortgage backed securities strategy specializes in arbitraging mortgage backed securities and their derivatives. This strategy takes place primarily in the United States. The market is over the counter and extremely complex. The two greatest risks are prepayment and valuation; all securities are marked to market, but the pricing and valuation models used by the different participants may vary, and overall market liquidity has a huge impact.
Most Favored Nation Clause
A clause that states that any side agreements negotiated by other investors will be also extended to
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Nearbys
The nearest delivery months of a commodity futures market.
Net Asset Value (NAV)
The total value of the fund's portfolio less liabilities. Equal to the closing market value of all securities within a portfolio plus all other assets, subtracting all liabilities, and then dividing the result by the total number of shares outstanding.
Net Exposure
The percentage of a fund is currently net invested in the market. It is calculated as the difference between the long and the short positions. For example, if a fund is 100% long and 25% short, then the fund is 75% net invested.
Net Long
A portfolio position whereby the long positions in a portfolio represent a greater portion than the short positions.
Net Position
The amount of currency bought or sold which have not yet been offset by opposite transactions.
Net Short
A portfolio position whereby the short positions in a portfolio represent a greater portion than the long positions.
NOB Spread
Note Against Bond. A futures spread trade involving the buying (selling) of a Treasury note futures contract and the selling (buying) of a Treasury bond futures contract.
No-Fault Divorce
A clause that stipulates the conditions under which limited partners may stop contributing capital to the partnership or even terminate the partnership.
Non-systematic Risk
Non-market or company specific risk factors that cannot be eliminated by diversification, in contrast to systematic risk which refers to risk factors common to an entire economy.
Notice of Delivery
A notice that must be presented by the seller of a futures contract to the clearinghouse. The clearinghouse then assigns the notice and subsequent delivery instrument to a buyer. Also Notice of Intention to Deliver.
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Offer (ask)
The rate at which a dealer is willing to sell a currency. See Ask (offer) price
Offset
Liquidating a purchase of futures contracts through the sale of an equal number of contracts of the
same delivery month, or liquidating a short sale of futures through the purchase of an equal number of contracts of the same delivery month.
Offsetting Transaction
A trade with which serves to cancel or offset some or all of the market risk of an open position.
Offshore Banking Unit (OBU)
A bank in an offshore financial center, not allowed to conduct business in the domestic market but only with other OBU's or with foreign persons.
Offshore Booking Centers
An offshore financial center used by international banks as a location for "shell branches" to book
certain deposits and loans. Such offshore bookings are often utilized to avoid regulatory restrictions
and taxes.
Offshore Limited Partnership
A partnership, the general partner of which is an offshore company. The limited partners may be
onshore entities.
Offshore Trust
The quality that differentiates an offshore trust from an onshore trust is portability. The offshore trust can be transferred to additional jurisdictions to maintain confidentiality and to advantage desirable
facets of the new jurisdictions laws.
On Track (or Track Country Station)
(1) A type of deferred delivery in which the price is set f.o.b. seller's location, and the buyer agrees to pay freight costs to his destination; (2) commodities loaded in railroad cars on track.
One Cancels the Other Order (OCO)
A designation for two orders whereby one part of the two orders is executed the other is automatically cancelled.
Open Interest
The total number of futures or options contracts of a given commodity that have not yet been offset by an opposite futures or option transaction nor fulfilled by delivery of the commodity or option exercise. Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted.
Open Order
An order that will be executed when a market moves to its designated price. Normally associated with Good 'til Cancelled Orders.
Open Position
An active trade with corresponding unrealized P&L, which has not been offset by an equal and opposite deal.
Opportunistic
This strategy refers to managers with the broad mandate to invest in any opportunity they identify in debt, equities, foreign currencies, physical commodities and derivatives in both developed and emerging markets globally. They invest in directional as well as hedged positions and typically use leverage in
order to increase their invested position.
Option
The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of
a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time.
Order
An instruction to execute a trade at a specified rate.
Overnight Position
A trade that remains open until the next business day.
Over the Counter (OTC)
Used to describe any transaction that is not conducted over an exchange.
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