An outright return achieved irrespective of overall market direction. Whereas traditional investments typically measure their success in terms of whether they track or outperform a key market benchmark or index (relative returns), hedge funds and alternative investment strategies aim to achieve outright positive returns irrespective of whether asset prices or key market indices rise or fall (i.e. absolute returns rather than relative returns).

Widely considered to be a measure of the 'value added' by an investment manager. It is therefore regarded as a proxy for manager or strategy skill. Alpha is sometimes described as outperformance of a benchmark or the return generated by an investment independent of the market - what an investment would hypothetically achieve if the market return was zero. More specifically, alpha is sometimes described as the return of an investment less the risk-free interest rate, or the return of the portfolio less the return on the S&P 500 index or some other relevant benchmark index.

The terms 'alternative investment' and 'hedge fund' often get used interchangeably as hedge funds are an important and growing part of the alternative investment arena, which also includes private equity and debt, venture capital and real estate. In the field of asset management, the essential defining features of alternative investments are: the pursuit of absolute returns. That is: - the quest to achieve a positive return regardless of whether asset prices are rising or falling - freedom to trade in a wide range of assets and instruments employing a variety of styles and investment techniques in diverse markets - reliance on the investment manager's skill and application of a clear investment process to exploit market inefficiencies and opportunities with identifiable and understandable causes and origins Alternative investment managers may take advantage of pricing anomalies between related securities, engage in 'momentum' investing to capture market trends, or utilise their expert knowledge of markets and industries to capture profit opportunities that arise from special situations. The ability to use derivatives, arbitrage techniques and, importantly, short selling - selling assets that one does not own in the expectation of buying them back at a lower price - affords alternative investment managers rich possibilities to generate growth in falling, rising and unstable markets.

The technique of exploiting pricing anomalies between related securities within and between markets with the aim of producing positive returns independent of the direction of broad market prices. By establishing long positions in under-valued assets and short positions in over-valued assets, arbitrageurs aim to capture profit opportunities that arise from the changing price relationship between the assets concerned. Specific investment styles that apply arbitrage techniques include convertible bond arbitrage, fixed income arbitrage, statistical arbitrage, and merger or risk arbitrage.

A measure of how sensitive an investment portfolio is to market movements. The sign of the beta (+/-) indicates whether, on average, the portfolio's returns move in line with the market (+), or in the opposite direction (-) to the market. If the beta of a portfolio relative to a benchmark index is equal to +1, then the returns on the portfolio follow those of the index. By definition, the beta of that benchmark index is +1. A portfolio with a beta greater than +1 tends to amplify the overall movements of the market, while a portfolio with a beta between 0 and +1 tends to move in the same direction as the market but not to the same extent. A portfolio with a beta of -1 tends to move in the opposite direction to the market.

The amount of investment capital that can be comfortably absorbed by a manager or strategy without a diminishing of returns. One useful indication of whether or not a manager or strategy faces capacity constraints is to analyse the degree to which they experience slippage [see Slippage] in the execution of their strategy or trades.

The compounded 'growth' of an investment that has been achieved each year to enable the initial price to grow to the latest selected price over a particular time period.

The manager or adviser of a managed futures [see Managed futures] fund. The term reflects the fact that early futures markets [see Futures] were commodities-based and were set up to enable producers and buyers to hedge against possible price movements in the underlying asset.

A strategy that synthetically reproduces the pay-out of a put or call option through dynamically adjusting the delta hedge of the underlying asset. Unlike a conventional option, the investment exposure (or participation) of the underlying asset will change over the life of the structure.

A bond issued by a company that has a set maturity date and pays interest in the form of a coupon. It has features of both a bond and stock and its valuation reflects both types of instrument. It gives the holder the option to convert the bond into a specific number of shares of the issuing company - in other words, it has an 'embedded option'.

Correlation is a measure of the interdependence or strength of the relationship between two investments. It tells us something about the degree to which the variations of returns from their respective means move together. So if two investments are positively correlated, when one performs above its mean return it is likely that the other will also perform above its own mean return. If two investments are negatively correlated, when one performs above its mean return it is likely that the other will perform below its mean return. Note that correlation says nothing about the mean returns themselves - they could both be up, or both down, or one could be up and one down. To measure the strength of the relationship, we use the correlation coefficient. Values range from -1 (perfect negative correlation), through 0 (no correlation or uncorrelated) to +1 (perfect positive correlation). From a risk management perspective, it is generally favourable if two investments are uncorrelated because it means that there is no identifiable directional pattern or proportional relationship between the deviations of their monthly returns from each of their respective trends - sometimes investment B is positively correlated to investment A when the returns of A are positive and negatively correlated when they are negative, meaning that over a period of time our strategy returns get closer to non-correlation. This produces a smoother overall return profile.

The specific day on which investors can subscribe (buy) or redeem (sell) their holding in a product, as detailed in the relevant product prospectus. The dealing day can be weekly, monthly or quarterly, depending on whether the product is valued weekly or monthly.

The sensitivity of an option price to moves in the price of the underlying asset.

Financial contracts such as futures [see Futures], options and various securities that offer 'synthetic' access to an underlying asset such as a commodity, stock market or fixed income security. The price movements of a derivative generally follow the price movements of the underlying asset but derivatives generally require only small amounts of capital (margin) to gain exposure to the underlying asset.

An investment is said to be in a drawdown when its price falls below its last peak [see Net new highs]. The drawdown is the percentage drop in the price of an investment from its last peak price. The period between the peak level and the trough is called the length of the drawdown, and the period between the trough and the recapturing of the peak is called the recovery. The worst or maximum drawdown represents the greatest peak to trough decline over the life of an investment.

The underlying proposition of fundamental analysis is that there is a basic intrinsic value for the aggregate stock market, various industries or individual securities and that these depend on underlying economic factors. The identification and analysis of relevant variables combined with the ability to quantify the future value of these variables are key to achieving superior investment results. A wide range of financial information is evaluated in fundamental analysis, including such income statement data as sales, operating costs, pre-tax profit margin, net profit margin, return on equity, cash flow, and earnings per share. Fundamental analysis contrasts with technical analysis which contends that the prices for individual securities and the overall value of the market tend to move in trends that persist.

A future is a derivative instrument [see Derivatives] that involves a contract to buy or sell an asset (stock index, commodity, currency, fixed income or other security) for delivery at a future date at a specific price.

The level of return (often the risk-free interest rate) which investment managers sometimes stipulate net new highs [see Net new highs] must exceed in order for performance fees to be charged [see Performance fee].

Leverage and gearing effectively mean the same thing: the process or effect of 'gearing up' or magnifying exposure to an investment strategy, manager or asset. Leverage can be achieved by borrowing capital or using derivatives [see Derivatives]. A leveraged investment is subject to a multiplied effect in the profit or loss resulting from a comparatively small change in price. Thus leverage offers the opportunity to achieve enhanced returns, but at the same time can result in a loss that is proportionally greater than the amount invested.

The segment of the alternative investment industry which actively trades and manages futures instruments [see Futures]. The advisers that focus their asset management efforts on futures are known as CTAs [see Commodity Trading Adviser]. They invest on both the long and short side of the market and usually employ quantitative or technical analysis [see Quantitative analysis/approach] and systematic investment processes.

The amount of capital that has to be deposited as collateral in order to gain full exposure to an asset.

Denotes an approach to investment where the emphasis is on the value of securities relative to each other and the use of arbitrage techniques [see Arbitrage], rather than market direction forecasting. By emphasising the relative value of securities and the exploitation of pricing anomalies between related securities, practitioners of market neutral approaches aim to generate profits regardless of the overall direction of broad market prices. Market neutrality is generally achieved by offsetting or hedging long and short positions or maintaining balanced exposure in the market. The term market neutral can be applied with some justification to the majority of alternative investment styles because of their ability to capitalise both on upward or downward price moves or to profit in a wide range of market environments.

A mathematical technique used to model the price characteristics of an investment structure based on random simulations of the underlying assets or variables that affect the price of that investment. In the context of the modelling carried out at Man, the analysis involves constructing multiple NAV paths for a product, net of all appropriate fees and interest, using random samples of gross monthly returns. The price characteristics that can be modelled using this powerful technique are known as 'path-dependent' characteristics, such as risk, return, and drawdowns, which depend on NAV movements over the life of an investment structure.

The speed of price change over a period of time. Momentum based investment styles, notably trend following approaches, aim to capitalise on the acceleration in directional price movements, be they upward or downward.

A net new high is reached when the net asset value of an investment exceeds the previous peak level in the net asset value (also known as the 'high watermark'). Performance fees [see Performance fee] are levied on net new highs.

A product that is permanently open for investment. New units (shares, bonds, units) are created or dissolved as required. Investors can subscribe (buy) or redeem (sell) these units at the prevailing net asset value per unit in accordance with the details set out in the relevant product prospectus.

A derivative instrument [see Derivatives] that gives the holder the right, but without any obligation, to buy (call) or sell (put) a security or asset at a fixed price within a specified period or at a particular future date.

Often referred to as an incentive fee, this is the fee earned by a manager on profits that surpass the previous high watermark - the peak level in the net asset value of an investment since inception [see Net new highs]. The calculation of performance fees is sometimes based on that portion of the new highs which exceeds a hurdle rate such as the risk-free interest rate.

By plotting the intersection of risk and reward for different investments or weightings of assets, one can generate a risk/reward curve or 'frontier' for those investments. The efficient frontier is the point on such curve where an investment combination delivers the most favourable balance of risk and reward.

An arrangement or mechanism built into an investment product whereby investors are assured that their initial or investment is secure and that this amount will at the very least be returned to them when such a product reaches its maturity date. Principal protection features can take a variety of forms, including capital guarantees provided by banks.

A representation of a track record [see Track record] that is developed to show the effect on actual performance of intended or potential adjustments for different fee structures, portfolio allocations or other variations in the investment structure upon which the original track record is based. It is important to note that a proforma is based on actual trading results and differs from a simulation, which models the hypothetical performance of a portfolio or investment approach that has yet to be applied or implemented in actual trading.

Analysis that uses subjective judgment to evaluate securities based on non-financial information such as management expertise, cyclicality of industry, strength of research and development, labour relations and depth of operational infrastructure. Qualitative analysis evaluates important factors that cannot be precisely measured rather than the actual financial data about a company.

Quantitative analysis uses statistical techniques to develop investment models using key financial ratios and economic indicators. The use of objective data facilitates the comparison of a large universe of securities to identify a select range of potential investment possibilities. Quantitative analysis deals with measurable factors in contrast from qualitative considerations such as the character of management.

Risk relative to return - the return achieved per unit of risk or the risk associated with a particular level of reward, typically represented by the Sharpe ratio [see Sharpe ratio].Improving the risk-adjusted return depends either on increasing returns and maintaining the level of risk, or maintaining the level of returns and lowering the associated risk.

A measure of risk-adjusted performance [see Risk-adjusted performance] that indicates the level of excess return per unit of risk. In the calculation of Sharpe ratio, excess return is the return over and above the short-term risk free rate of return and this figure is divided by the risk, which is represented by the annualised volatility or standard deviation [see Volatility and Standard deviation]. The greater the Sharpe ratio the greater the risk-adjusted return.

Selling securities that are borrowed rather than owned in the expectation of buying them back at a cheaper price.

The difference between the sample or target price for buying or selling an asset and the actual price at which the transaction takes place.

A measure of risk-adjusted performance [see Risk-adjusted performance] that indicates the level of excess return per unit of downside risk. It differs from the Sharpe ratio [see Sharpe ratio] in that it recognises investors' preference for upside ('good') over downside ('bad') volatility and uses a measure of 'bad' volatility as provided by semi-deviation - the annualised standard deviation of the returns that fall below a target return, say the risk free rate.

A widely used measurement of risk, usually used to represent volatility [see Volatility] derived by calculating the square root of the variance of the returns of an investment from their mean.

The particular investment process employed by a manager in the application of an investment style [see Style].

Typically provides principal protection [see Principal protection], invests across a range of styles and managers, provides increased investment exposure [see Leverage] and requires a high level of structuring expertise with respect to blending investment approaches, financing, liquidity and risk management.

A generic investment approach, such as equity hedge and long/short, event driven, arbitrage, global macro, fund of funds, that has developed as a result of numerous managers aiming to exploit a particular type of market inefficiency, sharing a broadly similar conceptual understanding of that inefficiency, and employing a broadly similar investment methodology in order to extract value. Practitioners of a particular style will have their own investment process or strategy with unique distinguishing features and techniques.

The basic premise of technical analysis is that prices move in trends that persist and this characteristic can be used to achieve superior returns. Technical analysis often uses computer programs to examine market data such as prices and volume of trading to make an estimate of future price trends and an investment decision. Unlike fundamental analysis, technical analysis is not concerned with the financial position of a company.

The total percentage return of an investment over a specified period, calculated by expressing the difference between the investment’s initial price and final price as a percentage of the initial price.

A performance report produced by an investment manager that is made available, usually on a monthly basis, to clients with holdings in a particular product. The report details the change in net asset value of a product and explains performance in light of market conditions as well as any relevant portfolio changes and developments.

The actual performance of an investment since inception, usually represented by audited monthly returns, net of fees.

The general direction of the market, a relatively persistent upward or downward price movement over a period, sometimes represented by the mean of price changes in that period.

A generic term used to describe the 'instrument' (share, bond, unit) which is issued by a product. Investors subscribe to or invest in a product by buying units and redeem their holding by selling units at the prevailing net asset value per unit, as detailed in the relevant product prospectus.

A widely used risk measurement technique that calculates (at a pre-specified level of probability) the loss that would be experienced in a day or some other pre-specified time horizon in the event of an increase in volatility or an adverse correlated move in market prices, assets or the investments making up a portfolio. At Man, the proprietary measure of VAR is also known as Total Portfolio Risk (TPR).

Volatility is the measurement of risk used most often in the investment industry. Put simply, it measures how variable price changes are in relation to the price trend for an investment. It is important to note that volatility says nothing about the direction of the trend itself. Expressed in slightly more technical terms, volatility is a measure of how much a set of returns for an investment deviates from the price trend or mean of that investment. It is usually calculated as 'standard deviation' [see Standard deviation] and expressed as 'annualised volatility' - the standard deviation on a yearly basis.