- "2 and 20"
- The classic hedge-fund fee structure: a 2% annual management fee on assets plus a 20% incentive (performance) fee on profits, often subject to a hurdle rate and a high-water mark.
- Hedge fund
- A privately offered, actively managed pooled fund that uses flexible tools — leverage, short selling, and derivatives — to pursue absolute returns, typically for institutional or accredited investors.
- Long/short equity
- A strategy that buys (longs) undervalued stocks and short-sells overvalued ones, so returns depend more on stock selection than on overall market direction.
- High-water mark
- The highest NAV a fund has previously reached. Incentive fees apply only to gains above that peak, so investors don't pay performance fees twice on the same gains after a drawdown.
- Hurdle rate
- A minimum return a fund must clear before the manager can earn an incentive (performance) fee.
- Equity market neutral
- A long/short strategy that balances long and short exposures to target roughly zero net market exposure (beta near 0), isolating stock-selection alpha.
- Merger (risk) arbitrage
- An event-driven strategy that buys a target and may short the acquirer to capture the spread between the current price and the announced deal price, betting the deal closes.
- Distressed securities (hedge fund)
- An event-driven strategy investing in the securities of firms in or near bankruptcy, profiting from a recovery or restructuring.
- Global macro
- A directional strategy taking positions across currencies, interest rates, equities, and commodities based on top-down macroeconomic views.
- Managed futures / CTAs
- Commodity trading advisors that systematically trade futures across asset classes, often trend-following; they tend to diversify a portfolio, sometimes profiting in crises.
- Convertible arbitrage
- A relative-value strategy that buys a convertible bond and shorts the underlying stock to profit from mispricing while hedging equity risk.
- Fixed-income arbitrage
- A relative-value strategy exploiting small pricing differences between related fixed-income instruments, usually with high leverage.
- Relative-value strategy
- A strategy that profits from the price relationship between two related securities rather than market direction (e.g., convertible, fixed-income, or volatility arbitrage).
- Event-driven strategy
- A strategy that profits from corporate events such as mergers, bankruptcies, spin-offs, and restructurings.
- Dedicated short bias fund
- A hedge fund that maintains a net short position, profiting when overvalued stocks or the market decline.
- Activist hedge fund
- A fund that takes large stakes and pushes management for changes — strategy, capital allocation, board seats — to unlock value.
- Net exposure
- Long exposure minus short exposure; it measures how much directional market risk a hedge fund retains. Market-neutral funds target roughly zero.
- Gross exposure
- Long exposure plus short exposure; it measures total market exposure and indicates how much leverage a fund is using.
- Lock-up period
- A minimum time an investor must keep capital in a hedge fund before redeeming, giving the manager stable capital for less-liquid positions.
- Redemption gate
- A limit on how much capital investors can withdraw in a given period, used to prevent forced selling during a run on the fund.
- Side pocket
- An account that isolates illiquid or hard-to-value holdings so they don't distort the fund's NAV or normal redemptions.
- Notice period
- The advance notice an investor must give before redeeming hedge-fund capital (e.g., 30–90 days).
- Survivorship bias in hedge-fund data
- An upward bias in index returns because failed or closed funds drop out of the database, leaving only survivors.
- Backfill (instant-history) bias
- An upward bias from adding a fund's strong past returns to a database only after it succeeds and chooses to report.
- Prime broker
- A bank that provides hedge funds with securities lending, financing (leverage), trade execution, and custody services.
- Master-feeder structure
- A fund structure where multiple feeder funds (e.g., onshore and offshore) invest into one master fund that trades, improving efficiency and tax treatment.
- Absolute return
- A goal of positive returns in all market environments, independent of a benchmark — the typical objective of hedge funds.
- Why use downside risk measures for hedge funds?
- Because hedge-fund returns are often non-normal and fat-tailed, measures like maximum drawdown and the Sortino ratio capture risk better than standard deviation alone.
- Multi-strategy hedge fund
- A fund that allocates capital across several strategies internally, shifting exposure as opportunities change and diversifying strategy risk.
- Short selling
- Selling borrowed securities hoping to buy them back later at a lower price; it profits from declines but has theoretically unlimited loss potential.
- Alternative investment
- Any asset outside traditional publicly traded stocks, bonds, and cash — hedge funds, private equity, private debt, real assets, and digital assets. Typically illiquid, complex, and low-correlation.
- What four traits define alternatives?
- Illiquidity, higher fees, complex valuation, and lower correlation with public markets.
- Alpha
- The excess return a manager earns beyond what market (beta) exposure explains, attributed to skill.
- Beta
- The return earned from exposure to a systematic market risk factor — the return you get simply for being invested in that risk.
- Alternative beta
- Return from exposure to a non-traditional risk premium (illiquidity, credit, value, momentum) that a simple benchmark misses; it can be mistaken for alpha.
- Illiquidity premium
- The extra expected return investors demand for locking up capital in assets that can't be quickly sold, such as private equity and real assets.
- General partner (GP)
- The manager of a private fund who makes investment decisions, sources deals, and earns management and incentive fees.
- Limited partner (LP)
- An investor in a private fund who provides capital with limited liability and no role in day-to-day management.
- Capital call (drawdown)
- A GP's request for LPs to transfer committed capital when it's needed for investments or expenses; capital is drawn over time, not all at once.
- What is a committed capital vs. invested capital?
- Committed capital is the total an LP pledges; invested (called) capital is the portion actually drawn down and deployed so far.
- Management fee
- An annual fee charged on assets under management (often ~2%), paid regardless of performance, to cover the manager's operating costs.
- Incentive (performance) fee
- A share of profits (often ~20%) paid to the manager, often subject to a hurdle rate and a high-water mark.
- Clawback provision
- A term requiring the GP to return excess carried interest if later losses mean the GP was overpaid relative to total fund profit.
- Operational due diligence
- Review of a fund's non-investment functions — valuation, back office, service providers, controls, compliance. Operational failures cause most fund collapses.
- Investment due diligence
- Evaluation of a manager's strategy, team, edge, risk management, and performance attribution before investing.
- Broad steps of due diligence
- Screening and sourcing, investment due diligence, operational due diligence, then the decision plus ongoing monitoring.
- Sharpe ratio
- Excess return per unit of total risk: (portfolio return − risk-free rate) ÷ standard deviation. Higher is better.
- Sortino ratio
- Like the Sharpe ratio, but it divides excess return by downside deviation only, penalizing harmful volatility rather than all volatility.
- Maximum drawdown
- The largest peak-to-trough decline in a fund's value over a period — a key risk gauge for alternatives.
- Skewness
- The asymmetry of a return distribution; negative skew means occasional large losses with smaller frequent gains.
- Kurtosis (fat tails)
- A measure of tail thickness; high kurtosis means extreme outcomes are more likely than a normal distribution implies.
- Why do alternatives diversify a portfolio?
- Their returns are driven by different factors and have low correlation with public stocks and bonds, lowering overall portfolio risk for a given return.
- Accredited investor
- An investor meeting income or net-worth thresholds (or holding certain credentials) who may access private offerings under SEC rules.
- Qualified purchaser
- An investor (often $5 million+ in investments) eligible for certain private funds exempt under the Investment Company Act.
- Correlation
- A standardized measure of co-movement between two assets, from −1 to +1; low or negative correlation drives diversification benefits.
- Benchmark for alternatives
- A reference index used to evaluate a manager; alternatives are hard to benchmark because of illiquidity and unique strategies.
- Liquidity risk
- The risk that an asset cannot be sold quickly without a large price concession — a defining feature of alternatives.
- Valuation risk in alternatives
- The risk that an asset's reported value is stale or subjective because there's no active market price, complicating fees and reporting.
- J-curve at the portfolio level
- The early period when fees and immature investments depress returns before gains are realized, common to private funds.
- Smoothing of returns
- Reported alternative returns can appear less volatile than reality because illiquid assets are marked infrequently, understating risk.
- CAIA Member Agreement
- The ethical agreement every CAIA member and candidate accepts, committing them to act with integrity, competence, and diligence, comply with laws and CAIA standards, and use the designation properly.
- Fiduciary duty
- The obligation to act in a client's best interest ahead of one's own, including a duty of loyalty (no self-dealing) and a duty of care (act prudently and diligently).
- Duty of loyalty
- A fiduciary's obligation to put the client's interests first and avoid self-dealing or conflicts that benefit the adviser at the client's expense.
- Duty of care
- A fiduciary's obligation to act prudently, diligently, and with the skill and judgment expected of a competent professional.
- Conflict of interest
- Any situation where a professional's personal or firm interest could compromise their duty to a client. Conflicts must be avoided where possible and fully disclosed where unavoidable.
- How should conflicts of interest be handled?
- Avoid them where possible; where unavoidable, disclose them fully and prominently so clients can judge for themselves.
- Suitability
- The requirement that a recommendation match the client's stated objectives, risk tolerance, and constraints.
- Fair dealing
- Treating all clients fairly when disseminating recommendations or taking action — equal (not necessarily identical) treatment.
- Rule when law and CAIA standards conflict
- Follow the stricter of the two. If a law is less strict or silent, still meet the higher standard; if a law would force a violation, comply with the law.
- Performance presentation (ethics)
- Communicating investment results in a way that is fair, accurate, and complete, without cherry-picking favorable periods.
- Confidentiality (ethics)
- Keeping client information private unless disclosure is required by law or authorized by the client.
- Misrepresentation
- Making untrue or misleading statements about investments, qualifications, or performance — prohibited under professional standards.
- Reasonable basis for a recommendation
- Adequate diligence, research, and analysis supporting an investment recommendation or action.
- Integrity of capital markets
- The principle that members must not engage in market manipulation or act on material nonpublic information that would undermine fair markets.
- Material nonpublic information (MNPI)
- Undisclosed information a reasonable investor would want, or that would move a security's price. Acting on it is prohibited.
- Soft-dollar arrangement
- Using client brokerage commissions to pay for research or services; it creates a conflict that must be managed and disclosed.
- Why is independence and objectivity important?
- Members must not let gifts, compensation, or pressure compromise their judgment; the safeguard is to maintain independence and disclose benefits.
- CAIA Code of Ethics
- The CAIA Association's set of ethical principles requiring members to act with integrity and professionalism and to place client and market integrity above their own interests.
- Why is ethics weighted heavily on the CAIA?
- Because the alternatives industry has opaque valuations, high fees, and limited transparency, making integrity and client protection especially important.
- Diligence and reasonable care
- Acting thoroughly and prudently in research, recommendations, and the management of client assets.
- Real assets
- Tangible or productive assets such as real estate, commodities, infrastructure, timberland, and farmland, valued for income and inflation protection.
- REIT
- A Real Estate Investment Trust — a company owning or financing income-producing real estate that trades like a stock and gives liquid real-estate exposure.
- Capitalization (cap) rate
- Net operating income divided by a property's value. A lower cap rate implies a higher price relative to income.
- How is the income (capitalization) approach used?
- Estimating property value as net operating income divided by the cap rate.
- Sales-comparison approach
- Valuing real estate using recent sale prices of comparable properties, adjusted for differences.
- Cost approach (real estate)
- Valuing a property as the cost to rebuild it minus depreciation, plus land value.
- Net operating income (NOI)
- A property's rental income minus operating expenses, before financing and taxes; the basis for income-approach valuation.
- How are commodities usually accessed?
- Mainly through futures contracts rather than holding the physical goods.
- What three parts make up commodity-futures return?
- The spot price change, the roll yield, and the collateral (interest on posted margin) yield.
- Contango
- A futures curve where futures prices exceed the expected spot price (upward slope), producing a negative roll yield for a long position.
- Backwardation
- A futures curve where futures prices are below the spot price (downward slope), producing a positive roll yield for a long position.
- Roll yield
- The gain or loss from rolling an expiring futures contract into a later-dated one; positive in backwardation, negative in contango.
- Why do commodities hedge inflation?
- Their prices often rise with the general price level, so they tend to perform well during unexpected inflation when many financial assets struggle.
- Infrastructure investing
- Investing in long-lived assets like toll roads, airports, utilities, and pipelines that offer stable, often inflation-linked cash flows.
- Timberland investing
- Owning forests for a biological yield (tree growth and harvest) plus land appreciation, with low correlation to stocks.
- Farmland investing
- Owning agricultural land for crop income and land appreciation, valued for inflation protection and diversification.
- What is the difference between core and opportunistic real estate?
- Core is stable, income-producing, low-leverage property; opportunistic uses high leverage and development for higher risk and return.
- Private real estate fund
- A pooled vehicle that buys, manages, and sells property directly, with lower liquidity but more control than public REITs.
- How do public REITs differ from direct property?
- REITs are liquid and daily-priced but behave more like equities, while direct property is illiquid and appraised infrequently.
- Leverage in real estate
- Using mortgage debt to finance property; it amplifies returns when values rise and losses when they fall.
- Commodity index
- A benchmark tracking a basket of commodity futures, used to gain diversified commodity exposure (e.g., energy, metals, agriculture).
- Precious metals as an investment
- Gold and silver held as a store of value and inflation hedge, often as a safe haven during market stress.
- Inflation hedge
- An asset whose value tends to keep pace with rising prices, protecting purchasing power; real assets are common examples.
- Natural resource investment
- Investment in productive land or commodities — timber, farmland, energy, metals — driven by physical supply and demand.
- Why are real-asset returns less correlated with stocks?
- Their values respond to physical supply and demand and inflation rather than corporate earnings cycles.
- Private debt (private credit)
- Loans or bonds made privately rather than through public markets, including direct lending, distressed debt, mezzanine, and venture debt.
- Direct lending
- Private debt where non-bank lenders originate and hold loans — usually senior secured and floating rate — to small and mid-sized companies.
- Distressed debt investing
- Buying the debt of troubled companies at deep discounts, profiting from a recovery, restructuring, or converting debt to equity.
- Mezzanine debt
- Subordinated debt sitting between senior debt and equity, carrying higher interest and equity-like upside such as warrants.
- Why did private debt grow after 2008?
- Banks retreated from middle-market lending due to tighter regulation, and private credit funds stepped in to fill the gap.
- Senior secured debt
- Debt backed by specific collateral and first in line for repayment in default — lowest risk and highest recovery in the capital structure.
- Capital structure priority
- Senior secured debt is paid first, then subordinated debt, then mezzanine, then equity last.
- Floating interest rate
- A rate that resets periodically with a reference rate (e.g., SOFR), reducing interest-rate risk for the lender.
- Default risk
- The risk a borrower fails to make scheduled interest or principal payments.
- Recovery rate (loss given default)
- The portion of a defaulted loan a lender expects to recover; higher for senior secured claims.
- Spread risk
- The risk that credit spreads widen, lowering the price of existing debt even without a default.
- Venture debt
- Loans to early-stage, often venture-backed companies, usually with warrants for equity upside to compensate for high risk.
- Covenant
- A clause in a loan agreement requiring or restricting borrower actions to protect the lender (e.g., leverage limits).
- Covenant-lite loan
- A loan with fewer maintenance covenants, giving the borrower more flexibility and the lender less protection.
- Unitranche loan
- A single loan blending senior and subordinated debt into one facility with a blended rate, common in direct lending.
- Leveraged loan
- A loan to a company that already has significant debt or a low credit rating, carrying a higher interest rate.
- High-yield (junk) debt
- Bonds rated below investment grade (below BBB−/Baa3) that pay higher yields to compensate for higher default risk.
- What is the difference between secured and unsecured debt?
- Secured debt is backed by collateral and ranks higher in default; unsecured debt has no specific collateral and lower recovery.
- Debtor-in-possession (DIP) loan
- Financing provided to a company in bankruptcy, typically granted priority status to help it continue operating.
- Restructuring
- Renegotiating a distressed company's debt — extending maturities, cutting principal, or swapping debt for equity — to avoid liquidation.
- Illiquidity premium in private debt
- Extra yield lenders earn for holding loans that can't be quickly sold, compared with liquid public bonds.
- Subordination
- The ranking of a claim below others in the capital structure, so it is paid only after senior claims are satisfied.
- Private debt fund's typical income
- Largely contractual interest income plus fees, giving more predictable cash flow than equity strategies.
- Credit analysis
- Assessing a borrower's ability and willingness to repay, including cash flow, leverage, collateral, and covenants.
- Role of an illiquidity lock-up in private debt
- Investors commit capital for years so the fund can hold loans to maturity, earning the illiquidity premium.
- Private equity
- Equity ownership in companies not listed on public exchanges, spanning venture capital, growth equity, and leveraged buyouts.
- J-curve
- The pattern in which a private fund's returns are negative early (fees and immature deals) then rise as gains are realized, tracing a J over time.
- Venture capital
- Private equity invested in early-stage, high-growth companies for an ownership stake, accepting high failure rates for outsized winners.
- Leveraged buyout (LBO)
- Acquiring a company using mostly borrowed money secured by the target's assets and cash flows, aiming to improve operations and exit at a profit.
- Carried interest (carry)
- The GP's share of fund profits as a performance incentive, commonly ~20% of gains above a hurdle, usually paid after LPs get capital plus a preferred return.
- Vintage year
- The year a private fund makes its first investment (or final close); comparing funds of the same vintage controls for market conditions.
- Growth equity
- Private equity invested in established, expanding companies, usually with less leverage than buyouts and lower risk than venture capital.
- Preferred return (hurdle)
- A minimum return LPs must receive before the GP earns carried interest.
- Sources of LBO returns
- Debt paydown, operational improvement, and multiple expansion (selling at a higher valuation multiple).
- Fund's investment period
- The early years when a PE fund actively deploys committed capital into new investments, typically the first 3–5 years.
- Harvest period
- The later years when a PE fund exits its investments and distributes proceeds to LPs.
- Common PE exit routes
- A trade sale to a strategic buyer, a sale to another financial sponsor, an IPO, or a recapitalization.
- IPO exit
- Taking a portfolio company public to sell shares and realize gains.
- Dry powder
- Committed capital a fund has raised but not yet invested, available for new deals.
- Capital commitment
- The total amount an LP pledges to a fund, drawn down over time via capital calls.
- Mezzanine financing in PE
- Subordinated debt with equity features used to fill the gap between senior debt and equity in a buyout.
- Secondary (PE secondaries)
- Buying an existing LP's stake in a private fund, often at a discount, providing the seller early liquidity.
- IRR for a PE fund
- The internal rate of return — the discount rate that sets the net present value of a fund's cash flows to zero; the standard PE performance measure.
- Multiple of invested capital (MOIC / TVPI)
- Total value (distributions plus residual value) divided by paid-in capital; how many times an LP's money has grown.
- Portfolio company
- A company owned by a private-equity or venture fund.
- Management buyout (MBO)
- A buyout in which the company's existing management team acquires the business, often with PE backing.
- Why is PE illiquid?
- Capital is locked up for the fund's life (often 10+ years), with no secondary market by default and value realized only at exit.
- Co-investment
- An LP investing directly alongside a fund in a specific deal, usually with reduced or no fees.
- What is a commitment vs. drawdown schedule?
- The plan by which committed capital is called over the investment period rather than funded all at once.
- Value creation in buyouts
- Improving a company's revenue, margins, and efficiency to raise its value before exiting.
- Blockchain
- A distributed, tamper-resistant digital ledger shared across many computers, so no single party controls it; transactions are grouped into validated blocks.
- Cryptocurrency
- A digital asset that uses cryptography and a blockchain for peer-to-peer value transfer without a central intermediary.
- Smart contract
- Self-executing code stored on a blockchain that runs automatically when predefined conditions are met — the basis of decentralized finance (DeFi).
- Consensus mechanism
- The protocol by which a blockchain's participants agree on valid transactions, such as proof of work or proof of stake.
- Proof of work
- A consensus mechanism where miners solve computational puzzles to validate transactions and add blocks, consuming significant energy.
- Proof of stake
- A consensus mechanism where validators are chosen to confirm blocks based on the amount of cryptocurrency they stake, using less energy than proof of work.
- Token
- A digital asset issued on an existing blockchain; types include payment, utility, security, and stablecoins.
- Utility token
- A token that provides access to a product or service on a platform, rather than representing an ownership claim.
- Security token
- A token that represents an investment claim (like equity or debt) and is generally subject to securities regulation.
- Stablecoin
- A digital asset designed to hold a stable value by being pegged to a reference asset such as a fiat currency.
- Decentralized finance (DeFi)
- Financial services — lending, trading, borrowing — built on blockchains using smart contracts instead of traditional intermediaries.
- Digital wallet
- Software or hardware that stores the private keys used to access and transfer digital assets.
- Private key
- A secret cryptographic code that controls a digital-asset wallet; whoever holds it controls the assets, so it must be secured.
- Custody risk for digital assets
- The risk of losing assets through theft, hacking, or lost keys; secure custody is a major institutional concern.
- Why are digital assets hard to value?
- They usually lack cash flows, so traditional discounting doesn't apply; valuation relies on network adoption, scarcity, and demand.
- Regulatory risk for digital assets
- The risk that evolving and uncertain laws restrict or reclassify digital assets, affecting their value and use.
- Volatility in digital assets
- Digital-asset prices swing far more sharply than traditional assets, creating both opportunity and substantial risk.
- Public (permissionless) blockchain
- A blockchain anyone can join, read, and write to, such as Bitcoin or Ethereum.
- Private (permissioned) blockchain
- A blockchain restricted to approved participants, often used by enterprises for controlled record-keeping.
- Tokenization
- Representing ownership of a real-world asset (e.g., real estate or a fund) as digital tokens on a blockchain.
- Fund of funds
- A fund that invests in a portfolio of other funds for diversification and manager selection, adding a second layer of fees.
- Main drawback of a fund of funds
- Two layers of fees — the fund of funds charges its own fee on top of the underlying funds' fees.
- Benefits of a fund of funds
- Diversification across managers, professional due diligence and manager selection, access to closed funds, and lower investment minimums.
- 'two layers of fees' problem
- Investors pay the fund of funds' fee plus the underlying funds' fees, so the FoF must add enough value to overcome the extra cost.
- Why use a fund of funds for access?
- Lower minimums and manager relationships let smaller investors reach funds they couldn't access directly.
- Manager selection value
- A fund of funds' skill in choosing and combining underlying managers, the main justification for its fee.
- How does a fund of funds reduce single-manager risk?
- By spreading capital across many managers, so one manager's failure or fraud has a limited portfolio impact.
- What liquidity should a fund-of-funds investor expect?
- Generally slower than holding a single fund, because redemptions depend on the underlying funds' own liquidity terms.
- What transparency trade-off comes with a fund of funds?
- Investors see the FoF's holdings less clearly and rely on the FoF manager's monitoring of underlying funds.
- Multi-manager fund
- A fund that allocates to several managers or strategies, similar in spirit to a fund of funds.
- Why might an institution skip funds of funds?
- Large institutions with their own due-diligence teams may invest directly to avoid the extra fee layer.
- Diversification across strategies in a FoF
- Combining managers using different strategies so the portfolio is less dependent on any single approach working.
- Priority of transactions rule
- Client transactions take priority over a member's or firm's own trades; personal trading must not disadvantage clients.
- Referral fee disclosure
- Members must disclose to clients any compensation received or paid for recommending products or services.
- Responsibility of supervisors
- Members in supervisory roles must take reasonable steps to detect and prevent violations by those they oversee.
- Record retention (ethics)
- Keeping records that support investment analysis, recommendations, and actions for the required period.
- Independence and objectivity
- Maintaining unbiased professional judgment and not letting gifts, fees, or pressure compromise recommendations.
- Loyalty to employer
- Members must act for the employer's benefit, not deprive it of their skills, and not divulge confidential information.
- CAIA charterholder requirement
- To use the designation, a candidate must pass both levels and maintain active CAIA Association membership.
- Limited partnership agreement (LPA)
- The contract governing a private fund — fees, terms, GP duties, capital calls, distributions, and LP rights.
- Side letter
- A separate agreement giving a particular LP terms not in the main fund documents, such as fee discounts or reporting rights.
- Fund administrator
- An independent service provider that calculates NAV, keeps books, and processes subscriptions and redemptions, supporting valuation integrity.
- Fund auditor
- An independent firm that audits a fund's financial statements, an important operational due-diligence check.
- Performance attribution
- Decomposing returns into the parts driven by market exposure, strategy, and manager skill.
- Information ratio
- Active return divided by tracking error — a measure of consistent value added relative to a benchmark.
- Value at risk (VaR)
- An estimate of the maximum loss expected over a period at a given confidence level (e.g., 95%).
- Limitation of VaR
- It says little about losses beyond the threshold and can understate tail risk for fat-tailed alternative returns.
- What is leverage and how does it affect risk?
- Borrowing to increase exposure; it amplifies both returns and losses and adds financing and margin-call risk.
- What is the difference between strategic and tactical allocation?
- Strategic sets long-run target weights; tactical makes short-term shifts to exploit opportunities.
- High-conviction strategy
- A concentrated approach betting heavily on a few ideas, raising both potential return and idiosyncratic risk.
- Correlation breakdown in a crisis
- When diversification fails because previously uncorrelated assets fall together during market stress.
- Why are alternatives benchmark-challenged?
- Illiquidity, infrequent pricing, and unique strategies make standard indexes poor comparisons.
- Role of diversification in a portfolio
- Combining low-correlation assets reduces total risk without necessarily reducing expected return.
- Downside deviation
- The volatility of returns below a target, used in the Sortino ratio to focus on harmful moves.
- Triple-net lease
- A lease where the tenant pays property taxes, insurance, and maintenance, giving the owner stable net income.
- What is the difference between equity and mortgage REITs?
- Equity REITs own property and earn rent; mortgage REITs lend and earn interest on real-estate debt.
- What is gross vs. net operating income?
- Gross is total rental revenue; net operating income subtracts operating expenses (but not financing or taxes).
- Development (opportunistic) project
- Building or repositioning property for higher return, using more leverage and accepting more risk.
- Collateral yield on commodity futures
- Interest earned on the cash (margin) posted to support a futures position.
- Convenience yield
- The benefit of holding a physical commodity (e.g., for production), which contributes to backwardation.
- Storage cost in commodities
- The cost of holding a physical commodity, which pushes futures curves toward contango.
- Spot price
- The current market price for immediate delivery of an asset or commodity.
- Futures price
- The agreed price today for delivery of an asset at a future date.
- What is committed vs. uncalled capital?
- Committed is the total pledged; uncalled is the portion the GP has not yet drawn.
- Recycling provision
- A term allowing a GP to reinvest returned capital during the investment period rather than distribute it.
- Placement agent
- A firm that helps a GP raise capital by introducing the fund to potential LPs for a fee.
- DPI (distributions to paid-in)
- Cumulative distributions divided by paid-in capital — realized return per dollar invested.
- RVPI (residual value to paid-in)
- The remaining (unrealized) value divided by paid-in capital.
- What is the difference between IRR and MOIC?
- IRR accounts for timing of cash flows; MOIC measures total multiple of capital regardless of timing.
- Continuation fund
- A new vehicle that buys assets from an existing fund to extend the hold and give original LPs liquidity.
- Senior secured loan's recovery advantage
- Backed by collateral and first in line, it typically recovers more in default than junior claims.
- Yield spread
- The extra yield a credit instrument pays over a risk-free benchmark to compensate for credit risk.
- Credit rating
- An agency assessment of a borrower's default risk; investment grade is BBB−/Baa3 and above.
- What is the difference between primary and secondary loan markets?
- Primary is original loan origination; secondary is trading existing loans among investors.
- Amortization of a loan
- Scheduled repayment of principal over the loan's life, reducing outstanding balance and risk.
- Bullet loan
- A loan that pays interest periodically and repays the full principal at maturity.
- Structured credit
- Pooling loans and issuing tranches with different risk and return, such as CLOs.
- CLO (collateralized loan obligation)
- A structured vehicle holding a pool of leveraged loans and issuing tranches with varying seniority and yield.
- What is a managed account vs. a fund?
- A managed account is a segregated portfolio owned by one investor, offering more transparency and control than a commingled fund.
- Fund's drawdown recovery
- The time and return needed to climb back to a prior high-water mark after a loss.
- Leverage's effect on hedge-fund returns
- It magnifies gains and losses and can force liquidation through margin calls in a downturn.
- Style drift
- When a manager deviates from the stated strategy, changing the fund's risk profile unexpectedly.
- Crowded trade
- A position many funds hold simultaneously, raising the risk of sharp losses if they all exit at once.
- Volatility arbitrage strategy
- A relative-value strategy that trades the difference between implied and realized volatility, often using options.
- Capacity constraint
- The limit on how much capital a strategy can manage before its returns degrade.
- What is the difference between directional and non-directional funds?
- Directional funds bet on market moves; non-directional (market-neutral) funds aim to profit regardless of direction.
- Fund's incentive-fee crystallization
- The point at which earned performance fees are locked in and paid to the manager, typically annually.
- Liquidity mismatch in a hedge fund
- Holding illiquid assets while offering more frequent redemptions, risking forced sales during withdrawals.
- Non-fungible token (NFT)
- A unique blockchain token representing ownership of a specific digital or physical item, not interchangeable one-for-one.
- Mining (crypto)
- Using computing power to validate transactions and add blocks in a proof-of-work blockchain, earning new coins as a reward.
- Staking
- Locking up cryptocurrency to help secure a proof-of-stake network in exchange for rewards.
- Centralized exchange
- A platform run by a company that holds custody and matches digital-asset trades for users.
- Decentralized exchange (DEX)
- A platform that lets users trade digital assets directly via smart contracts, without a central custodian.
- Hard fork
- A backward-incompatible change to a blockchain's rules that creates a new, separate chain.
- Hash function
- A one-way cryptographic function that converts data into a fixed-length string, securing blockchain integrity.
- Layering of due diligence in a fund of funds
- The FoF performs investment and operational due diligence on each underlying manager before allocating.
- Netting risk of fees in a FoF
- Investors may pay performance fees to a winning underlying fund even when other underlying funds lose, raising total fees.
- Hybrid fund of funds
- A vehicle combining direct investments and allocations to other funds.
- Fund's NAV
- Net asset value — total fund assets minus liabilities, divided by units outstanding; used to price subscriptions, redemptions, and fees.
- Subscription (into a fund)
- An investor's purchase of units in a fund at the current NAV.
- Redemption
- An investor's withdrawal of capital from a fund, sold back at NAV subject to liquidity terms.
- Fund's high-water-mark reset risk
- After a deep loss, a manager may struggle to recover above the mark, reducing incentive to stay — an alignment concern.
- Alignment of interest
- Structuring fees and GP co-investment so the manager profits only when investors do.
- GP co-investment (commitment)
- Capital the GP invests in its own fund, aligning its interests with LPs.
- What is the difference between absolute and relative return goals?
- Absolute targets positive returns in all markets; relative aims to beat a benchmark.
- Tail risk
- The risk of rare, extreme losses in the far tail of the return distribution.
- Liquidity tiering in a portfolio
- Holding assets across a range of liquidity so cash needs can be met without forced sales of illiquid holdings.
- Role of a custodian
- An institution that safeguards a fund's assets, separate from the manager, reducing fraud risk.
- Fund's beta exposure
- The portion of returns explained by market movements rather than manager skill.
- Portable alpha
- Adding a manager's skill-based return on top of a separate market (beta) exposure obtained cheaply via derivatives.
- 130/30 fund
- A strategy that is 130% long and 30% short, keeping ~100% net market exposure while adding short alpha.
- Statistical arbitrage
- A quantitative relative-value strategy exploiting short-term price relationships across many securities.
- Quantitative (systematic) hedge fund
- A fund that trades using rules-based models and algorithms rather than discretionary judgment.
- Discretionary hedge fund
- A fund where managers make trading decisions based on judgment and analysis rather than fixed models.
- Carry trade
- Borrowing in a low-yield currency to invest in a higher-yield one, profiting from the rate differential.
- Special purpose vehicle (SPV)
- A separate legal entity created to isolate a specific investment or risk.
- Absolute-return real-asset strategy
- Targeting positive real (inflation-adjusted) returns from tangible assets regardless of market direction.
- Depreciation in real estate
- An accounting expense reflecting wear on a building, which lowers taxable income without a cash outlay.
- Real-estate operating partnership
- The entity through which a REIT holds and manages properties, often using an UPREIT structure.
- What is the difference between price and total return for commodities?
- Price return is the spot move only; total return adds roll and collateral yields.
- Commodity producer hedge
- A producer selling futures to lock in a price and reduce revenue uncertainty.
- What is a first-lien vs. second-lien loan?
- First-lien claims are repaid first from collateral; second-lien claims rank behind them, with higher yield and risk.
- Payment-in-kind (PIK) loan
- A loan whose interest is paid by adding to the principal rather than in cash, deferring cash outflow.
- Loan-to-value (LTV) in lending
- The loan amount divided by the collateral's value; lower LTV means more cushion for the lender.
- What is the difference between sponsored and non-sponsored lending?
- Sponsored loans back a PE-owned company; non-sponsored lend to independently owned firms.
- Maintenance covenant
- A covenant requiring the borrower to meet financial ratios on an ongoing basis, tested periodically.
- Growth-vs-buyout risk difference
- Growth equity uses little debt and backs expanding firms; buyouts use heavy leverage on mature firms — different risk profiles.
- Add-on (bolt-on) acquisition
- A buyout fund growing a portfolio company by acquiring smaller related businesses.
- Exit multiple expansion
- Selling a company at a higher valuation multiple than it was bought for, boosting returns.
- Dividend recapitalization
- A portfolio company borrowing to pay a dividend to its PE owner, returning capital before exit.
- Gas (transaction fee) on a blockchain
- A fee paid to validators to process and confirm a transaction, varying with network congestion.
- What is on-chain vs. off-chain?
- On-chain transactions are recorded on the blockchain; off-chain occur outside it, settled later or via layers.
- Layer-2 solution
- A protocol built on top of a base blockchain to increase speed and lower fees, settling back to the main chain.
- Fund-of-funds capacity advantage
- It can access closed or capacity-constrained underlying funds through existing relationships.
- Diversification limit of a FoF
- Adding too many underlying funds can dilute returns toward the average while still charging an extra fee.
- What is a fiduciary vs. suitability standard?
- A fiduciary must act in the client's best interest; a suitability standard only requires recommendations to be appropriate.
- Whistleblowing in professional conduct
- Reporting illegal or unethical conduct; protecting market and client integrity can require it.
- Gift and entertainment policy
- Rules limiting gifts that could compromise objectivity, requiring disclosure or pre-approval.
