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P | Q | R | S | T
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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Pairs Trading
An investment strategy that seeks to identify two companies with similar characteristics whose equity securities are currently trading at a price relationship that is out of their historical trading range. Investment strategy will entail buying the undervalued security, while short selling the overvalued security.
Partnership Agreement
Legal document that sets forth the terms and conditions of a private equity or hybrid investment vehicle. The partnership agreement also establishes the roles of general and limited partners.
Path Dependent Option
An option whose valuation and payoff depends on the realized price path of the underlying asset, such as an Asian option or a Lookback option.
Pegging
Effecting commodity transactions to prevent a decline in the price of the commodity so that previously written put options will expire worthless, thus protecting premiums previously received.
Performance Bond Margin
The amount of money deposited by both a buyer and seller of a futures contract or an options seller to ensure performance of the term of the contract. Margin in commodities is not a payment of equity or down payment on the commodity itself, but rather it is a security deposit.
Percent Long
The amount of a fund, expressed as a percentage, that is invested in long positions.
Percent Short
The amount of a fund, expressed as a percentage, that is invested in short positions.
Performance Fee
Compensation paid to a manager who achieves returns above a high water mark or a hurdle rate. Sometimes referred to as an incentive fee.
Pips
The smallest unit of price for any foreign currency. Digits added to or subtracted from the fourth
decimal place, i.e. 0.0001. Also called Points.
Political Risk
Exposure to changes in governmental policy which will have an adverse effect on an investor's position.
Position
The netted total holdings of a given currency.
Position Limit
The maximum number of speculative contracts one can hold as determined by the Commodity Futures Trading Commission and/or the exchange upon which the contract is traded. Also referred to as trading limit.
Premium
In the currency markets, describes the amount by which the forward or futures price exceed the spot price.
Price Basing
A situation where producers, processors, merchants or consumers of a commodity establish commercial transaction prices based on the futures prices for that or a related commodity (e.g., an offer to sell
corn at 5 cents over the December futures price). This phenomenon is commonly observed in grain
and metal markets.
Price Transparency
Describes quotes to which every market participant has equal access.
Prime Broker
A broker who provides services to hedge funds in addition to trade execution, including some or all of back office, trade reconciliation, financing, recordkeeping and custody.
Principals' Market
A market where the ring dealing members act as principals for the transactions they conclude across
the ring and with their clients.
Profit /Loss or "P/L" or Gain/Loss
The actual "realized" gain or loss resulting fromtrading activities on Closed Positions, plus the theoretical "unrealized" gain or loss on Open Positions that have been Mark-to-Market.
Prompt Date
The date on which the buyer of an option will buy or sell the underlying commodity (or futures contract)
if the option is exercised.
Proof of Funds (POF)
A document by which the principal's bank states that the principal owns the funds required for the transaction. Usually, proof of funds can also be delivered in the form of a recent bank, security or custody statement.
Protector
A person appointed by the settlor/grantor of a trust, who has limited powers to control the trustee.
The protector usually has the right to change trustees. - Q - Back to Top
Quote
An indicative market price, normally used for information purposes only.
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R-Squared
R-Squared reflects the percentage of a fund's movements that is explained by movements in the fund's benchmark index. An R-Squared of 100 means that all movements of a fund are completely explained
by movements in the benchmark index. A low R-Squared means that few of a fund's movements are explained by the movements of the index. For example, an R-Squared of 35 means that 35 % of a
fund's movements can be explained by movements in the fund's index. R-Squared is used to assess the significance of a particular alpha or beta. As a rule, a higher R-Squared indicates a more reliable beta figure. Conversely, if the R-Squared is lower, then the beat is less relevant to the performance of the fund.
Rally
A recovery in price after a period of decline.
Range
The difference between the highest and lowest price of a future recorded during a given trading session.
Rate
The price of one currency in terms of another, typically used for dealing purposes.
Ratio Hedge
The number of options compared to the number of futures contracts bought or sold in order to establish a hedge that is risk neutral.
Ratio Spread
This strategy, which applies to both puts and calls, involves buying or selling options at one strike price
in greater number than those bought or sold at another strike price.
Redemption
The return of an investor's principal in a security, such as a stock, bond, or mutual fund at it's current market value less fees.
Redemption Fee
A fee charged upon a voluntary redemption from an investment fund.
Redemption Notice Period
The required notification period of an intended redemption request. Notification is usually required in writing.
Regulation D
This strategy, usually called Reg D, involves investing in micro and small capitalization public companies which are raising money in the private capital markets. The manager can invest via the stock, via convertibles or other derivatives. Investments usually take the form of receiving a convertible bond or convertible preferred issue in return for an injection of capital. What is unique about these securities is that, unlike, standard convertible bonds or preferreds, the exercise price either floats or is subject to a look back provision. This has the effect of insulating the investor from a decline in the price of the underlying stock. Typically the investor will be long the convertible, short a percentage of common
stock and also hold warrants. On the effective dates of the transaction the manager can exercise, if he chooses to, and convert into common stock at a better market price.
Reset or Floating Conversion Rate Securities
This strategy involves investing either directly and/or indirectly in either the common shares, convertible securities or warrants of a public company. A common form of this strategy involves providing private financing.
Resistance
A term used in technical analysis indicating a specific price level at which analysis concludes people will sell.
Retender
In specific circumstances, some contract markets permit holders of futures contracts who have received a delivery notice through the clearing house to sell a futures contract and return the notice to the clearinghouse to be reissued to another long; others permit transfer of notices to another buyer. In either case, the trader is said to have retendered the notice.
Revaluation
An increase in the exchange rate for a currency as a result of central bank intervention. Opposite of Devaluation.
Reverse Conversion
With regard to options, a position created by buying a call option, selling a put option, and selling the underlying futures contract.
Reverse Crush Spread
The sale of soybean futures and the simultaneous purchase of soybean oil and meal futures. The purchase of soybean futures and the simultaneous sale of soybean oil and meal futures.
Risk
The extent to which investment returns fluctuate from period to period. The primary types of risks associated with alternative investments include financial risk, operating and business risk, liquidity risk, structural risk, valuation risk, and country risk when undertaking international investments (Also see Standard Deviation).
Risk Arbitrage
See Merger Arbitrage.
Risk Management
The employment of financial analysis and trading techniques to reduce and/or control exposure to various types of risk.
Roll-Over
A trading procedure involving the shift of one month of a straddle into another future month while holding the other contract month. The shift can take place in either the long or short straddle month.
The term also applies to lifting a near futures position and re-establishing it in a more deferred delivery month.
Round Trip
Buying and selling of a specified amount of currency.
Round Turn
A completed transaction involving both a purchase and a liquidating sale, or a sale followed by a
covering purchase. - S - Back to Top
Scalper
A speculator on the trading floor of an exchange who buys and sells rapidly, with small profits or losses, holding his positions for only a short time during a trading session. Typically, a scalper will stand ready
to buy at a fraction below the last transaction price and to sell at a fraction above, thus creating market liquidity.
Secondary Funds
Partnership-style funds formed for the purpose of acquiring limited partnership interests, as a secondary purchase, from an original investor who no longer wants to own the limited partnership interest. These funds are typically purchased at a discount from their estimated value in recognition that the purchaser
is acquiring a relatively illiquid investment. Secondary Funds are often considered to be in the Special Situations category.
Sector Funds
Sector funds invest in specific industries or segments of the economy. They tend to be equity long/short managers that develop a view of the industry and use fundamental analysis to identify opportunities within that industry.
Selling Hedge (or Short Hedge)
Selling futures contracts to protect against possible declining prices of commodities that will be sold in
the future. At the time the cash commodities are sold, the open futures position is closed by purchasing an equal number and type of futures contracts as those that were initially sold. See Hedging.
Series
All option contracts of the same class that also have the same expiration date and strike price.
Settlement
The process by which a trade is entered into the books and records of the counterparts to a transaction. The settlement of currency trades may or may not involve the actual physical exchange of one currency for another.
Settlement Price
The last price paid for a commodity on any trading day. The exchange clearinghouse determines a firm's net gains or losses, margin requirements, and the next day's price limits, based on each futures and options contract settlement price. If there is a closing range of prices, the settlement price is determined by averaging those prices. Also referred to as settle or closing price.
Sharpe Ratio
Used to measure how much profit an investor received per unit of risk. The higher the ratio, the safer (less risky) the strategy.
Sharpe Ratio = (Net Return - Risk Free Rate of Return)/Risk
Where Risk = Standard Deviation of the Return
A ratio greater than or equal to one indicates that the return is greater than or proportional to the risk the investor incurred to earn that return. A Sharpe Ratio greater than 1.0 is generally considered very good, while a ratio greater than 2.0 is considered excellent.
Shipping Certificate
A negotiable instrument used by several futures exchanges as the futures delivery instrument for several commodities (e.g. soybean meal, plywood and white wheat). The shipping certificate is issued
by exchange-approved facilities and represents a commitment by the facility to deliver the commodity
to the holder of the certificate under the terms specified herein. Unlike an issuer of a warehouse receipt who has physical product in store, the issuer of a shipping certificate may honour its obligation from current production or through-put as well as from inventories.
Shock Absorber
A temporary restriction in the trading of stock index futures which becomes effective following a significant intraday decrease in stock index futures prices. Designed to provide an adjustment period to digest new market information, the restriction bars trading below a specified price level. Shock
Absorbers are generally market specific and at tighter levels than circuit breakers.
Short Exposure
The percentage of a fund's assets that are invested in short positions. For example, a manager may be 60% long and 100% short, giving him a market exposure of 40% net short.
Short Investing
An investment strategy where the manager sells securities short in anticipation of being able to rebuy them at a future date at a lower price due to the manager's assessment of the market.
Short Position
A short position occurs when an individual investor sells a security they do not own.
Short Selling
Is the selling of a security that the seller does not own.
Skewness
The skewness is the third moment about the mean divided by the cube of the standard deviation. It characterizes the degree of asymmetry of a distribution around its mean. The skewness is nondimensional. It is a pure number that characterizes only the shape of the distribution. A positive
value of skewness signifies a distribution with an asymmetric tail extending out towards more positive x; a negative value signifies a distribution whose tail extends out towards more negative x.
Soft Commodities
Commodities such as coffee, cocoa, sugar and may include oilseeds, cotton, grains and orange juice. Metals, livestock and financial futures are generally not included in this category.
Sortino Ratio
The Sortino Ratio was developed to distinguish between good volatility and bad volatility. It is similar to the Sharpe Ratio, except it uses downside deviation for the denominator, whereas Sharpe uses
standard deviation. Downside deviation only considers returns that fall below a determined threshold, rather than the mean. It would be expected that a fund managed within tight risk limits would have a smaller downside deviation than the typical upward standard deviation. This smaller divisor means a relatively higher Sortino when compared to the Sharpe. If the Sortino is lower than the Sharpe, then
the fund might be riskier than the Sharpe Ratio alone implies.
Sold-Out-Market
When liquidation of a weakly-held position has been completed, and offerings become scarce, the
market is said to be sold-out.
Special Situations
Invests in event-driven situations such as mergers, hostile takeovers, reorganizations, or leveraged buyouts. May involve simultaneous purchase of stock in companies being acquired, and the sale of stock in its acquirer, hoping to profit from the spread between the current market price and the ultimate purchase price of the company. May also utilize derivatives to leverage returns and to hedge out
interest rate and/or risk. Results generally not dependent on direction of market.
Spot Price
The current market price. Settlement of spot transactions usually occurs within two business days.
Spread (or Straddle)
The purchase of one futures delivery month against the sale of another futures delivery month of the same commodity; the purchase of one delivery month of one commodity against the sale of that same delivery month of a different commodity; or the purchase of one commodity in one market against the sale of the commodity in an another market, to take advantage of a profit from a change in price relationships. The term spread is also used to refer to the difference between the price of a futures month and the price of another month of the same commodity. A spread can also apply to options.
Spreadlock
An option to enter into a currency or interest rate swap. One party may agree to provide a swap over
a defined period ( usually less than 6 months ) at an agreed-upon spread over a reference rate comparable to the maturity of the anticipated swap.
Square
Purchase and sales are in balance and thus the dealer has no open position.
Stages
First Stage
Financing provided to companies that have expended their initial capital and require funds, often to initiate commercial manufacturing and sales.
Second Stage
Working capital for the initial expansion of a company that is producing and shipping and has growing accounts receivable and inventories. Although the company has clearly made progress, it may not yet
be showing a profit.
Third Stage
Funds provided for the major growth of a company whose sales volume is increasing and that is beginning to break even or turn profitable. These funds are typically for plant expansion, marketing
and working capital development of an improved product.
Follow-on/Later Stage
A subsequent investment made by an investor who has made a previous investment in the company - generally a later stage investment in comparison to the initial investment.
Standard Deviation
The most widely accepted measurement of volatility (risk). Specifically, it measures the degree to which returns have been spread out around their historical mean or average. It is the square root of the variance ( average squared difference between the actual return and the average return ). Standard deviation does not distinguish between positive and negative volatility. In other words, it interprets any movement above or below the historical mean - as undesirable. Upside volatility is "good risk".
Steer/Corn Ratio
The relationship of cattle prices to feeding costs. It is measured by dividing the price of cattle ($/hundredweight) by the price of corn ($/bushel). When corn prices are high relative to cattle prices, fewer units of corn equal the dollar value of 100 pounds of cattle. Conversely, when corn prices are
low in relation to cattle prices, more units of corn are required to equal the value of 100 pounds of beef. See Feed Ratio.
Sterling
slang for British Pound.
Sterling Ratio
A return / risk ratio in which return is defined as the Compound Annualized Rate of Return over the last
3 years, and risk is defined as the Average Yearly Maximum Drawdown over the last 3 years less an arbitrary 10 %. To calculate the average yearly drawdown, the latest 3 years is divided into 3 separate 12-month periods and the maximum drawdown is calculated for each. These 3 drawdowns are averaged to produce Average Yearly Maximum Drawdown for the 3 year period.
Stop-Close-Only Order
A stop order which can only be executed, if possible, during the closing period of the market.
Stop Loss Order
Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor's position. As an example, if an investor is long USD at 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate, possibly below 155.49.
Strangle
An option position consisting of the purchase or sale of put and call options having the same expiration but different strike prices.
Strangle
The simultaneous sale or purchase of both a call and a put with the same expiration month and different strike prices.
Strike Price
The stated price per share for which underlying stock may be purchased (in the case of a call option) or sold (in the case of a put option) by an option holder.
Strong Hands
When used in connection with delivery of commodities on futures contracts, the term usually means
that the party receiving the delivery notice probably will take delivery and retain ownership of the commodity; when used in connection with futures positions, the term usually means positions held by trade interests or well-financed speculators.
Support Levels
A technique used in technical analysis that indicates a specific price ceiling and floor at which a given exchange rate will automatically correct itself. Opposite of resistance.
Swap
In general, the exchange of one asset or liability for a similar asset or liability for the purpose of lengthening or shortening maturities, or raising or lowering coupon rates, to maximize revenue or minimize financing costs. In securities, this may entail selling one issue and buying another in foreign currency, it may entail buying a currency on the spot market and simultaneously selling it forward.
Swaps may also involve exchanging income flows; for example, exchanging the fixed rate coupon
stream of a bond for a variable rate payment stream, or vice versa, while not swapping the principal component of the bond.
Swaption
An option to enter into a swap - - i.e., the right, but not the obligation, to enter into a specified type of swap at a specified future date.
Swissy
Market slang for Swiss Franc.
Switch
Offsetting a position in one delivery month of a commodity and simultaneous initiation of a similar
position in another delivery month of the same commodity, a tactic referred to as "rolling forward".
Systematic Risk
Also called market risk, systematic risk is an unanticipated event that effects almost all assets in some part, because the effect is economy -wide.
Statistical Arbitrage
Statistical arbitrage strategies are long/short stock portfolios that are determined based on quantitative models for selecting specific stocks and measuring market exposure. Based on these models, high
ranking securities are purchased and low ranking securities are sold short in relative quantities designed to result in an aggregate portfolio that is neutral to broad equity market movements. Often, these models rely upon fundamental balance sheet and income statement data such as: earnings yield; dividend yield; revisions in earnings forecasts; relationship between market capitalization, revenues
and net asset values; earnings forecasts; and price histories. Other approaches utilize factor analysis
to measure risk factors and relative attractiveness.
Subordinated Debt
High yield junior debt financing, which may be secured or unsecured. Normally the investor purchases a debenture; if secured the debenture will be subordinated to all senior debt within the issuer. If unsecured, the debenture will be subordinated not only to the senior debt but potentially all trade liabilities as well. The lender typically receives a commitment fee for arranging the transaction, a relatively high coupon and an equity kicker. The term of subordinated debt ranges from 5 to 10 years, but always longer than the senior debt to ensure that the subordinated lender cannot be repaid before the senior lender.
Systematic Trading
These strategies take a directional view in markets based on computer models. The strategies reflect an emphasis on market trends and behavioral psychology.
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Technical Analysis
An effort to forecast prices by analyzing market data, i.e. historical price trends and averages,
volumes, open interest, etc.
Ted Spread
The difference between the price of the three-month U.S. Treasury bill futures contract and the price
of the three-month Eurodollar time deposit futures contract with the same expiration month.
Theta
A derivative of the option price equation with respect to the remaining time to expiration of the option.
A measure of the sensitivity of the value of the option to the passage of time.
Tick
The smallest allowable increment of price movement for a futures contract. Also referred to as Minimum Price Fluctuation.
Time Value
The amount of money option buyers are willing to pay for an option in the anticipation that, over time,
a change in the underlying futures price will cause the option to increase in value. In general, an option premium is the sum of time value and intrinsic value. Any amount by which an option premium exceeds the option's intrinsic value can be considered time value. Also referred to as extrinsic value.
Tomorrow Next (Tom/Next)
Simultaneous buying and selling of a currency for delivery the following day.
Tracking Error (Annualized)
A measure of the unexplained portion of performance relative to a benchmark. It is calculated by taking the square root of the average of the squared deviations between the investment's returns and the benchmark's returns, then multiplying the result by the square root of 12.
Transaction Cost
The cost of buying or selling a financial instrument.
Transaction Date
The date on which a trade occurs.
Transparency
Refers to the degree with which knowledge about the organization, portfolio holdings, investment objectives and other criteria of a manager are made available to an investor.
Treynor Ratio
Similar to the Sharpe Ratio, except it use beta as the volatility measurement. Return is defined as the incremental average return over the risk-free rate and then divided by the beta.
Triple Witching Hour
This happens four times a year. The 3rd Friday of March, June, September and December. It occurs when the S&P futures contract expires at the same time as the S&P 100 index option contract and
option contract on individual stocks.
Turnover
The total money value of all executed transactions in a given time period; volume.
Two-Way Price
When both a bid and offer rate is quoted for a FX transaction.
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