ABS Asset-Backed Securities — debt securities which have their interest and principal repayments sourced principally from a generic group of income producing assets.
CMBS Commercial Mortgage-Backed Securities — a category of ABS which have their interest and principal repayments sourced principally from a pool of commercial real estate mortgages.
Correlation The correlation coefficient is a statistical measure of the degree to which the returns on two assets are related. A correlation of –1.00 indicates that the two assets’ returns always move in opposite directions to one another, while a correlation of 1.00 indicates that they always move together. A correlation near zero suggests that returns are likely to be are independent of one another. To achieve optimal diversification in a portfolio it is desirable to invest in assets with low or negative correlations.
Leverage The borrowing of funds to increase the amount invested in any particular position in the expectation that the return on the position will exceed the cost of borrowing. Some trades target very small price spreads and a manager needs leverage to magnify these returns. Leverage both magnifies the risk of a strategy and creates an obligation to the lender that can give the lender some control over the manager’s positions.
LIBOR London Interbank Offer Rate for sterling, dollars or euros as applicable.
Long / short equity The most common hedge fund strategy involving both long and short equity positions but not with the objective of being market neutral. It is a directional strategy with the manager able to shift from net long to net short. Funds may target particular market segments or regions and employ derivatives and options to manage portfolio risk.
Repurchase Agreement a method of financing the acquisition of an asset involving an agreement for the sale of securities for spot or current delivery and the simultaneous repurchase of those securities for forward or delayed delivery. The difference between the sale price and the higher purchase price provides income to the counterparty.
RMBS Residential Mortgage-Backed Securities — a category of ABS which have their interest and principal repayments sourced principally from a pool of residential real estate mortgages.
Sharpe Ratio A statistical measure of the risk adjusted return of an asset, calculated by dividing the return of the asset in excess of the risk free rate by the annualised standard deviation of its returns.