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Absolute Returns
Returns unrelated to and independent of any index measure of performance.
Active Return
The investment rewards gained for an active management approach that pursues returns in excess of pre-determined or decided benchmark. Passive management aims to match a benchmark.
Arbitrage
Taking strategic advantage of differentials in the price of securities such as stocks, bonds and currencies to make opportune profits.
Bear Market
A persistent downturn in the market where there is a decline in share prices.
Benchmark
The point of reference (usually an index or another portfolio) against which performance is measured. The active manager looks to significantly out-perform the returns of a benchmark.
Bull Market
The opposite to a bear market where the market rises and share prices rally upwards.
Buying Price
The price at which the invetor is able to buy units from the management company. This price includes initial and compulsory charges.
Cash/Futures Arbitrage
A strategy characterised by long (short) the stocks in an index together with a short (long) in the index futures contract. The position is held to maturity, usually 3 to 6 months.
Collateralised Loans
The strategy is to invest in securitised bank loans to earn a positive carry over the funding rate. Fees are earned for arranging loans and deal syndication as well.
Contrarian Investing
The contrarion investment manager goed against the norm, buying shares that are cheap, even when others are pessimistic and selling at high prices when others are more optimistic. Value managers are typical contrarion investors.
Convertible Arbitrage
The strategy is to take positions in convertible bonds while hedging out certain market risks to profit from an appreciation in the value of a specific feature of the convertible.
Dedicated Short Bias
See short sellers. To be classified as this type of manager, the short bias of the portfolio must be constantly greater than zero. Leverage is created because margins are below 100%. It is a time consuming and expensive strategy where the manager needs efficient stock borrowing and lending facilities.
Derivatives
Investment contracts that allow the investor to buy or sell exposure to an index or security to bring about a long or short position in the under lying investment. Therefore, they are derived from (a "derivative" of) the under lying primary investment.
Discretionary Trading
Strategies characterised by speculation on the direction of currency, equity, commodity and bond markets. The fund manager may employ computer models but the portfolio decision is largely subjective.
Distressed Securities
The strategy involves investing in the illiquid debt or equity of firms in or near bankruptcy to profit from potential recovery. Portfolios are generally unleveraged. Equity risk may be hedged by shorting the stock or using index derivatives.
Dividend
An amount paid to investors from a share from a company s after tax profits.
Emerging Equity Long / Short
The strategy attempts to exploit informational inefficiencies in emerging markets. Portfolios will generally take long positions in the securities of firms operating in emerging markets. Shorts may not be available in many emerging markets so the manager may have to short ADR s or related securities.
Emerging Markets
Markets that are currently small but that have the potential for growth. These markets typically represent higher risk and are regarded as more volatile.
Equities
Shares representing part of the equity or ownership of a company.
Equity Arbitrage
Strategies that exploit mispricings of equity and equity derivative securities.
Equity Market Neutral
This strategy is designed to exploit equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country. These portfolios are designed to be either beta or currency neutral [equal currency long and short] or both. Leverage is often used to enhance returns.
Equity Trading
Sometimes called momentum investing and includes unit trust timers. Today some equity traders use purely technical signals like relative strength and price momentum in valuing potential growth shares.
ERM
European Exchange Rate Mechanism.
Event Driven
These strategies are designed to exploit a specific capital markets transaction. The strategy is successful if a specific event occurs within an expected time frame.
Fixed Income Arbitrage
These strategies attempt to capture mispricing within and across global fixed income markets and associated derivatives. Leverage is used to enhance returns.
Fixed Income Long / Short
These strategies attempt to hedge out interest rate risk on government and corporate debt investments by using shorts, futures and swaps, and by moving between principal gain and yield investments.
Fully Invested
This means that all the money in an investment vehicle (fund) is invested in shares rather than holding some in cash.
Fund
A pool of investors money that is invested in stocks, bonds etc. and is managed by a fund manager.
Fund of Funds
A single investment fund that invests in a range of unit trust funds run either by a management company or other fund management groups. The managing company concentrates on choosing funds that will offer the best returns while considering the investor s risk/return profile.
General Equity Fund
Unit trusts that are invested in a wide selection of shares across all sectors of the JSE. The mandate would allow the manager to invest in large, medium, small, growth, etc type stocks across the stock market. Typically, these funds tend to be heavily weighted in equities with a medium risk profile.
Gilt
This indicates a government stock or bond. The government raises money for large projects by issuing fixed-interest securities to the investing market.
Global Macro (Global Opportunistic)
These are strategies that employ a top-down macroeconomic approach to opportunistic investing globally. Managers will attempt to exploit changes in interest rates, exchange rates and liquidity for different instruments.
Growth Stocks
These are usually company shares that have long-term growth forecasts. These shares often carry higher than average volatility and risk but on the upside, offer excellent returns.
Hedge Fund
Investment strategy which aims to minimise risk and capture gains in any given situation without reliance on general market directions.
High Watermark
Ensures that performance fees are earned only after achieving absolute performance. Watermarks often apply to accumulated losses that need to be recouped before advancing to hurdle rates for determination of absolute performance fees.
High Yield
Or "junk bonds". High yield investing involves applying a buy/hold, or a trading strategy to high yield securities.
Hurdle Rates
Minimum investment returns a fund must exceed before a performance fee can be accrued.
Income Distribution
The payment of income from a unit trust investment to an investor. Usually income distributions occur quarterly or bi-annually.
Index Arbitrage Trading
This strategy involves the purchase of a basket of stocks in an index and the simultaneous sale of a futures contract on the same index. This position is held to maturity, usually three or six months, and assuming that the manager is not forced to close out the position before then, there is little or no risk.
Investment Style
The area of the market in which each investment house prefers to operate shows his style. African Harvest offers growth and value as investment styles. These are offered by two completely separate teams who have very little investment contact with each other.
IPO
Initial Public Offering is the first sale of shares to investors on a public stock exchange.
Large Capitalisation Shares
These are typical of large market capitalisation companies. Market capitalisation is the total value the stock market places on a company and is calculated by multiplying the number of shares in issue by the price of the shares.
Leverage
Also known as gearing. The ratio of money borrowed divided by the capital used to secure the borrowings. Normally stated as a percentage of the capital, for example, 300% where borrowings are three times capital.
Linked Product Companies
Independent investment companies that offer investors access to unit trusts from a number of different unit trust management companies. Investors could benefit from being able to manage a single portfolio across a number of companies.
Liquidity
The cash content of an investment fund is a measure of its liquidity. The term also refers to the ability of the asset manager to quickly buy or sell investments.
Long / Short
This is a broad category of strategies characterised by long positions in securities expected to appreciate in value together with short positions in securities expected to depreciate in value.
Macro Economics
Major issues concerning economic principles such as changes in interest rates, inflation rates and political administrations.
Managed Futures
Or "commodity trading advisers" [CTAs]. These managers trade in the listed financial and commodity futures markets around the world. They may also trade in the global currency markets. Most managers apply a systematic approach and trade a very diversified range of markets and contracts. They seek to identify trends in each market or contract.
Management Company
A management company is responsible for the operation of a unit trust. This includes marketing, investment management, administration and statutory requirements.
Market Timers
Fund managers that vary their long/short exposure in response to market factors within a short period of time.
Market Timing
Investment managers use economic and technical information to determine when they should buy or sell shares. This process is called market timing.
Merger Arbitrage (Risk Arbitrage)
These strategies seek to exploit the change in price of a firm s securities as a result of a takeover or merger. In many cases, the manager will go long the securities of the firm being acquired while shorting the securities of the acquiring firm.
Mortgage Backed Securities Arbitrage
These strategies specialize in arbitraging mortgage backed securities and their derivatives. This strategy takes place mainly in the US. The market is OTC and extremely complex.
Multi -Strategy
Multi-strategy or funds of hedge funds invest in portfolios diversified by manager and strategy. They achieve a blend of different strategies and asset classes, which provide consistent long-term investment returns with low risk. Factors such as returns, risk and volatility can be managed more efficiently through greater diversification, use of experienced high quality management and enhanced liquidity. This ensures that the primary aim of capital preservation and absolute returns is achieved.
Options
The right, but not the obligation, to buy or sell a security at a given price within a certain time frame.
Price Earning (P/E) Ratio
A technical term, it means that the price of a share divided by its earnings per share, gives you a pe ratio. The figure provides investors with an idea of the actual cost for the earning power of any given company.
Qualitative Analysis
This entails the complete due diligence report on a company, the fund manager and the fund. It includes details of the organisation, the experience and qualifications of the fund management team, the culture and philosophy of the company and a detailed analysis of the entire investment process.
Quantitative Analysis
The analysis concentrates on the past performance of a fund. The method uses a number of statistics to measure the risk and risk-adjusted performance of the fund. It also analyses the performance of the fund on an absolute basis as well as relative to one or more benchmarks.
Redemption
Cashing in of financial interests in an investment fund.
Regional Funds
Strategies designed to tactically exploit opportunities in specific geographical regions.
Regulation D Arbitrage (Private Placement Arbitrage)
Strategies that attempt to profit from appreciation in the value of short-term investments in firms that need to raise capital quickly.
Reinvestment
Constitutes an agreement between the management company and unitholder by which income distributions are used to buy additional units in the fund.
Relative Value (Market Neutral, Statistical Arbitrage)
These are strategies that attempt to isolate return specific to assets while hedging out systematic factors driving return for the assets.
Risk-Adjusted Returns
Returns reflecting the level of risk required to achieve them. If two funds have given the same return over a period, the one with the lowest volatility will have the better risk-adjusted returns.
Risk/Reward Trade-Off
The fact that an investment that carries a higher risk profile stands to also generate higher returns. Higher risk is usually acceptable on long-term investments where the effects of cyclical downturns and periods of poor performance will be smoothed.
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.
SEC
Securities and Exchange Commission, a US regulatory authority.
Sharpe Ratio
The Sharpe Ratio measures the return of a fund, adjusted per unit of absolute risk. The ratio is calculated by deducting the risk free return on cash from the fund return. The result is then divided by the fund's level of risk. Should the resulting Sharpe Ratio be positive, this indicates that the risk that has been under taken relative to investments in cash instruments has been rewarded.
Short Position
An investor sells shares he does not own. He is said to have "gone short" of the shares, resulting in a short position.
Short Sellers
Funds that attempt to add value by taking short positions in assets that are expected to depreciate in value.
Short Selling
Selling shares not actually owned. The seller sells shares he does not own on the calculated basis that before he must deliver the stock he will get the chance to purchase the shares at a lower price. If the pr ice of the shares does fall, he will make a profit. If the price rises, he will have to buy the shares at the higher pr ice and will therefore incur a loss.
Small Capitalisation Shares
The shares of smaller companies listed on the JSE. Small cap shares offer good return potential, but also often carry a higher risk.
Special Situations
These are event driven strategies where the event is a spin-off or a corporate re-organisation that will affect the price of the firms securities.
Specialist Equity Fund
Unit trusts that aim to achieve growth through focused exposure to a selected sector of the stock market. They are mostly regarded as more volatile than general equity funds because they have a narrower investment spread.
Standard Deviation
This evaluation tool measures the average deviation of a series of returns relative to their mean. When a fund has a wide range of returns it has a high standard deviation, indicating greater potential for volatility. If returns are normally distributed, about two thirds will occur within approximately one standard deviation of the mean. The lower the percentage standard deviation on a fund, the lower the risk associated with it.
Stock Picking
An investment management strategy that relies on choosing the right stocks in which to invest rather than timing the market or using a broader view of sectors or markets.
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.
Tactical Trading
Strategies that reflect a focus on systematic factors (i.e. interest rates, inflation, etc.) driving returns.
Top-Down Investing
Using industry, economic and market trends as the basis for deciding which companies will do well in the future.
Unit Trust
A traditional style of collective investment where investors buy units in a fund at the offer price and sell at the bid price. Usually there is a difference of approximately 5% between offer and bid prices. The dual pricing allows the fund manager to offset the bid/offer spread against charges and commissions levied on the fund.
Value Stocks
Shares that have low prices relative to their earnings potential. This is a less volatile type of stock than growth stocks.
Volatility
The measure of instability in the prices of a share. Shares with high volatility will rise and fall dramatically.
Volatility Arbitrage
This strategy, also known as split strike conversion, involves a) purchasing equity shares b) selling related out-of-the-money call options, and c) buying related in-or-at-the-money put options. The strategy makes no use of short selling or leverage.
Weighting
A portfolio is said to be overweight or underweight in a given sector, e.g. financials, style or market e.g. emerging, if its holding in that area represents a higher or lower percentage of its total portfolio than its benchmark. In other words, if value shares represent 10% of the JSE and a unit trust fund has 15% of its portfolio invested in value shares, the fund is said to be overweight in value.
Yield
The percentage return on an investment, usually expressed as an annual rate. The yield of a unit trust is the annual income expressed as a percentage of the repurchase (selling) price. The figure quoted is gross yield before tax.
