Alpha – The incremental return of a manager when the market is stationary. In other words, it is the extra return due to nonmarket factors. This risk-adjusted factor takes into account both the performance of the market as a whole and the volatility of the manager. A positive alpha indicates that a manager has produced returns above the expected level at that risk level, and vice versa for a negative alpha.

Beta – This is a measure of a portfolio’s volatility. Statistically, beta is the covariance of the portfolio in relation to the market. A beta of 1.00 implies perfect historical correlation of movement with the market. A higher beta manager will rise and fall more rapidly than the market, whereas a lower beta manager will rise and fall slower. For example, a 1.10 beta portfolio has historically been 10% more volatile than the market.

American Depositary Receipts (ADR) – ADRs are a negotiable certificate issued by a U.S. bank representing a specified number of share(s) in a foreign stock that is traded on a U.S. exchange. They are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas.

Bottom-Up / Top-Down – Denotes an equity manager’s investment approach:

  • Active – Active managers rely on analytical research, forecasts, and their own judgment/experience in making investment decisions on what securities to buy, hold and sell.
  • Quasi-Active – A quasi-active approach tracks a stock market index but with certain modifications in place to allow for more equivalent position sizes, the exclusion of certain securities, or the use of leverage. all with the goal of beating the return of the tracking index.
  • Passive – Passive management is an investment strategy that mirrors a market index and does not attempt to beat the market.
  • Bottom-Up – A bottom up approach focuses on fundamental analysis which utilizes the balance sheet and income statements of companies in order to forecast their future stock price movement. It takes into account past records of assets, earnings, sales, products, management, and markets in predicting future trends, and concluding whether the stock is overvalued or undervalued.
  • Top-Down – A top-down approach involves looking at the “big picture” of what is going to happen to economies, currencies, politics, and the rest of the financial world before making decisions about investing with individual companies.
  • Quantitative – Quantitative analysis seeks to understand behavior by using mathematical and statistical modeling, measurement and research.
  • Long/Short – Long-Short equity style involves buying certain stocks long and selling others short. These products use leverage, derivatives and/or short positions in an attempt to maximize total returns.

Capitalization – The current total market value of a company’s common stock. We rely on Russell and MSCI for capitalization based definitions. Generally, large cap represents the largest 70% of a country’s equity market, mid cap represents 20% and small cap represents 10%.

Commodities – Commodities are physical goods that are consumed or used for manufacturing. Unlike stocks and bonds which are financial assets, commodities are real assets. These goods are used worldwide on a daily basis. Commodities include agricultural products such as wheat and cattle, energy products such as oil and gasoline, and metals such as copper, gold and silver. There are also “soft commodities” which include sugar, cotton, cocoa, and coffee. The primary traded commodities and those found most often in the major commodity indices are grouped into these categories: Energy, Industrial Metals, Grains, Softs, Precious Metals and Livestock.

Convertible Bonds – A convertible security is a bond or preferred stock that can be exchanged – or converted – into a specific number of shares of common stock, typically of the issuer’s company. The conversion ratio is determined at the time of issuance, and typically can be acted upon by the holder at any time. Convertible bonds are technically classified as debt instruments because they pay interest and have a maturity date. They are most often issued as subordinated debt and have default risk.

Currency Hedging – This indicates how currency risk is managed within an international, global, or emerging market strategy. Investment managers can take very different approaches to hedging currency risk. They can use currency hedging as a means of seeking added value, they can be defensive and use hedging to protect invested principal or they can choose to not hedge at all. Many firms that do not explicitly engage in any form of currency hedging do typically factor currency risk into the purchase decision of their securities.

Directional Alternatives – Directional Alternatives generally involves equity-oriented investing, but can include global macro and short-term trading strategies. The objective is not a market neutral approach. Managers invest in long securities they believe will appreciate and will short securities they believe are likely to decline. By trading both sides of the a markets, managers have the opportunity to potentially add value on long and short. Equity long/short managers in particular have the ability to shift from value to growth, from small to medium to large capitalization stocks, and from a net long position to a net short position. Managers may use futures and options to hedge. The focus may be regional, such as long/short US or European equity, or sector specific, such as long and short technology or healthcare stocks. Long/short equity funds tend to build and hold portfolios that are substantially more concentrated than those of traditional stock funds.

Diversified Alternatives – Diversified Alternative strategies seek to generate returns by exploiting market inefficiencies while minimizing exposure and correlation to traditional stock and bond investments. By exploiting inefficiencies in the pricing of marketable securities, diversified alternative managers attempt to produce high single digit returns while having low correlation to traditional marketable securities. This is generally accomplished through investments in event-driven, credit oriented and value-driven strategies as well as market neutral equity trading strategies.

Duration – (Effective Duration) – A duration calculation for bonds with embedded options. It is the percentage change in bond price per change in the level of market interest rates.

  • Short: <2 years
  • Intermediate: 3-5 years
  • Long: >6 years

ETF – Denotes an exchange traded fund (i.e. fund tradable on exchanges)

Foreign Ordinary Shares – Stocks bought by investors in the United States in foreign companies that are traded on their home markets, as opposed to stocks that trade in the United States. Ordinary stocks are equivalent to common stocks traded on U.S. markets.

Fund of Funds – Fund of Funds invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The Fund of Funds manager has discretion in choosing which strategies to invest in for the portfolio. A manager may allocate funds to numerous managers within a single strategy, or with numerous managers in multiple strategies.

High Yield Corporate Bonds – The term ‘high yield’ or ‘junk’ generally means those bonds that have a large credit risk premium compared to a comparable risk-free bond. High-yield bonds are generally considered to be those bonds that lack an investment grade credit rating. This includes securities that are rated lower than BBB by Standard & Poor’s and less than Baa by Moody’s Investor Services. A rating below investment grade denotes an issuer at greater risk of default, and as such, these companies are required to pay a higher interest rate to fund their debt.

High Yield Municipal Bonds – In the municipal sector ‘high-yield,’ ‘junk’ or ‘speculative grade’ bonds are securities rated below investment grade or maintain no rating at all. Bonds rated below investment grade maintain a rating below BBB- and Baa3 by Standard & Poor’ and Moody’s respectively. These rating characteristics are assigned due to the general risk profile of the issuer. In short, these issuers have a greater risk of default, or delay in coupon and principal payments. Investors require a greater yield or spread relative to a less risky bond as compensation for the inherent credit risks and liquidity risks.

Investment Grade Corporate Bonds – Corporate bonds are debt obligations issued by private and public corporations to raise money for a variety of purposes including equipment purchases, business expansion or building maintenance. Investment grade bonds constitute all bonds rated BBB- or higher by S&P or Baa3 or higher by Moody’s. These bonds are high quality and most likely to be repaid by the issuing company.

Leveraged Loans – Leveraged Loans are known under several monikers including Bank Loans, Syndicated Loans, Floating Rate Securities and High Yield Corporate Loans. In their most simple form, leveraged loans are senior secured loans made to speculative-grade borrowers. Leveraged loans have a shorter lifespan than high yield bonds, with the average security issued in 5- to 7-year terms and pegged on a floating rate basis to the London Interbank Offered Rate (LIBOR) + 150 to 650 basis points.

LP/LLC – Denotes a limited partnership product structure.

  • Accredited: An Accredited Investor is defined in Rule 501 of SEC Regulation D to include:
    1. A bank, insurance company, registered investment company, business development company, or small business investment company.
    2. An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million.
    3. A charitable organization, corporation, or partnership with assets exceeding $5 million.
    4. A director, executive officer, or general partner of the company selling the securities.
    5. A business in which all the equity owners are accredited investors.
    6. A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase.
    7. A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. or
    8. A trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
  • 3(c)1: Available to “accredited investors” with $1m net worth and $200k income
  • 3(c)7: Available to “qualified purchasers” with $5m net worth

Managed Futures – This strategy invests in listed financial and commodity futures markets and currency markets around the world. The managers are usually referred to as Commodity Trading Advisors, or CTAs. Trading disciplines are generally systematic or discretionary. Systematic traders tend to use price and market specific information (often technical) to make trading decisions, while discretionary managers use a judgmental approach. CTA funds are different from long only commodity funds. With the CTA the emphases is on the model being used to identify trading opportunities and the trends in futures contracts, whether the trend is up, in which case the CTA would go long the contract or the tern is down, in which case the CTA would go short the futures contract.

Master Limited Partnerships (MLPs) – MLPs are publicly traded partnerships that have the liquidity of an exchange traded, US public security but the tax benefits of a limited partnership. To qualify as an MLP, the partnership is required to receive 90% of its income from specified sources. These sources include interest, dividends, real estate rents, gains from the sale or disposition of real property, income and gain from commodities or commodity futures and income from mineral or natural resources activities. Mineral or natural resource activities include exploration, development, production, mining, refining (including fertilizers), and transportation (including pipelines) of oil and gas, minerals, geothermal energy, or timber.

Mortgage Backed Securities (MBS) – Mortgage-backed securities (MBS) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. Mortgage loans are purchased from banks, mortgage companies, and other originators and then assembled into pools by a governmental, quasi-governmental, or private entity. The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool, a process known as securitization. Most MBSs are issued by the Government National Mortgage Association (Ginnie Mae), a US government agency, or the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), US government-sponsored enterprises. Ginnie Mae, backed by the full faith and credit of the US government, guarantees that investors receive timely payments. Fannie Mae and Freddie Mac also provide certain guarantees and, while not backed by the full faith and credit of the US government, have special authority to borrow from the US Treasury. Some private institutions, such as brokerage firms, banks, and homebuilders, also securitize mortgages, known as "private-label" or non-agency mortgage securities.

MF – Denotes a mutual fund.

Quality – Denotes the average investment quality of all of the bonds held in the portfolio.

  • High Quality – Bonds rated above investment grade by private independent credit rating agencies (AAA, AA, A, and BBB)
  • High Yield – Bonds rated below investment grade by private independent credit rating agencies (below BBB)

Real Estate Investment Trusts (REITs) – REITs are companies that own and, in most cases, operate income-producing real estate such as apartments, shopping centers, offices, hotels and warehouses. Some REITs also engage in financing real estate. The shares of a REIT are freely traded, usually on a major stock exchange. To qualify as a REIT, a company must distribute at least 90 percent of its taxable income to its shareholders annually. A REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income. Taxes are paid by shareholders on the dividends received and any capital gains.

SA – Denotes a separate account.

Single Strategy – An alternative investment fund that is advised by a single manager. These funds may use diversified strategies, but due to idiosyncratic manager risk, they do not offer the same diversification benefit as fund-of-funds.

Strategy – Denotes equity manager style emphasis:

  • Core – An investment approach that does not rely heavily on a value or growth bias.
  • Growth – Traditional Growth style managers seek out companies whose earnings are expected to grow at an above-average rate as compared to its industry or the overall market.
  • Growth at a reasonable Price (GARP) – A growth style that is more sensitive to valuation.
  • Conservative Growth – A growth style that focuses more on stable growers rather than less consistent, faster growing stocks.
  • Value – Traditional Value managers seek stocks that tend to trade at lower prices relative to their fundamentals, and thus considered undervalued. These stocks typically have a low P/E ratio, low P/B ratio and/or a high dividend yield.
  • Relative Value – A value style in which a manager seeks companies trading at discounts to their peers or to their own historical valuation multiples (i.e. P/E, P/B, P/CF).
  • Deep Value – A value style in which a manager seeks companies trading at deep discounts to their intrinsic or book values – these are often considered distressed or out of favor.
  • Dividend Value – A value style with a focus on dividend paying stocks.

Treasury Inflation-Protected Securities or TIPS – TIPS are issued by the U.S. Treasury and are designed to provide protection against inflation. TIPS protect investors from inflation through adjustments to the bond’s principle as the Consumer Price Index (CPI) changes. Coupon payments are made two times a year at a fixed rate and are directly correlated to the adjusted principle. Thus, interest payments will trend higher with inflation and lower with deflation.

Turnover Ratio – This indicates the level of trading activity being conducted in a specific investment strategy. This is calculated by taking the lesser of purchases and sales and dividing by the average annual market value times 100%. High turnover managers tend to focus on short term market drivers, whereas low turnover managers tend to invest for the long term.

Typical # of Holdings – The number of holdings within a mutual fund or separately managed account. (Concentrated < 50 holdings, Regular 50 – 100 holdings, Diversified >100 holdings.