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A

Absolute return

The objective is to achieve a positive level of return and the return is not related to or benchmarked to any indices.

Active management

An investment strategy which aims to outperform a particular market or sector. Active managers have full flexibility in deciding what securities to buy and sell based on investment research, market forecasts, and their own judgment.

Aggressive growth fund

Aggressive growth funds aim to invest in higher risk securities to capture higher long-term capital growth.

Alpha

A numerical value indicating excess rate of return relative to a benchmark.

Alternative investment

An investment that has a low statistical correlation of its risks and returns with traditional investments such as stocks or bonds.

Annual return

The average annual profit or loss realized by an investment at the end of a specified calendar period.

Arbitrage

An investment strategy that aims to exploit market inefficiencies as reflected in price discrepancies between same or related securities. For example, a fund manager may simultaneously purchase and sell similar or identical securities at different prices to yield profits.

Asset allocation

Invest in a basket of securities and assets such as currencies, bonds and stocks.

Authorized funds

A unit trust or mutual fund that meets the requirements of the Hong Kong Securities & Futures Commission and is allowed to be sold in Hong Kong. Authorization does not imply recommendations by the SFC.

B

Baby funds

Baby funds are the underlying funds in which a fund of funds invests.

Balanced fund

A unit trust or mutual fund that aims to provide some combination of growth, income, and conservation of capital by investing in a mix of stocks, bonds, and/or money market instruments.

Benchmarks

Benchmarks are well-established and commonly used indices (or group of securities) that seek to be representative of the markets in which the securities trade. In other words, a benchmark is a proxy for an investible universe. For example, the S&P 500 is a widely used benchmark for US equities. To a certain extent, a benchmark can give you an indication of the value-added brought by the fund manager.

A traditional unit trust/mutual fund focuses on outperforming a relevant benchmark whereas a hedge fund tends to focus on achieving an absolute return in all market conditions.

Beta

Beta is a historical measure of an investment's sensitivity when compared to a benchmark. It represents the percentage change in a fund's value for each 1% change in the fund's benchmark. If the beta is more than 1, the investment typically moves (which can be up or down) more than the benchmark. Generally, the higher the correlation is between the investment and its benchmark (as measured by R-squared), the more meaningful the measure of beta.

Bid-offer spread

The difference between the fund's buy and sell price.

Black-Scholes

An options valuation model developed by Fisher Black and Myron Scholes in 1973. It is one of the most widely used option pricing models used to determine the fair market value of an option. In valuing an option it takes into consideration the price of the underlying security, the exercise price of the option, the risk free interest rate, the time to maturity of the option and the standard deviation of the underlying asset/security price.

Bond fund

A unit trust or mutual fund that invests in debt securities issued normally by corporations and government. Bond funds generally emphasise on regular income stream.

C

Call option (or "call")

A call option is an option that gives the holder the right, but not the obligation, to buy the underlying security usually at a pre-determined price.

Calmar ratio

A ratio that calculates the average annual return of a fund for a period of time divided by the maximum drawdown during that period.

Capital guaranteed hedge fund

A capital guaranteed hedge fund is a hedge fund that guarantees the return of capital to investors, subject to the fulfillment of certain conditions. Under the SFC Guidelines on Hedge Funds, hedge funds with a 100% capital guarantee will not be required to impose any minimum subscription (individual fund houses may set a minimum).

Closed-end fund

A unit trust or mutual fund that has a fixed number of shares, usually listed on a major stock exchange.

Contribution

Regular investments made into a unit trust savings plan or the Mandatory Provident Fund Scheme.

Convertible bond arbitrage

An investment strategy that seeks to arbitrage the discrepancy in price that sometime appears between a company's convertible bonds (or preferred stock) and the same company's equities. Typically a convertible bond arbitrage manager would purchase the convertible bond (or preference share) and sell the equity to try and capture the spread between the prices of the two securities. This strategy usually relies on the ability of the fund manager to convert the convertible bond into a pre-specified number of shares. Convertible bond arbitrage is a relatively conservative investment style amongst hedge funds. The style focuses on returns with low or no correlation to the market.

Correlation

Correlation is a measurement of the relationship between two variables. It may denote the movement in the value of a fund against its benchmark. Correlation coefficients range between +1.0 to -1.0. Assets with a correlation of +1.0 consistently move in the same direction as the underlying benchmark and vice versa for -1.0. A correlation of zero means the assets are unrelated.

D

Daily valuation

The calculation of the latest market value of a fund's underlying assets on each business day.

Defined benefit plan

A retirement plan that promises to pay a certain amount, usually based on the number of years of service and on the average salary in the period before retirement. Employers generally bear all investment risks.

Defined contribution plan

A retirement plan offering a benefit that depends on the total contributions made by the employer and the employee, and on the investment returns earned by those contributions. Employees generally bear the investment risk.

Distressed securities

Distressed securities are securities of companies undergoing reorganization such as a reorganization that results from a bankruptcy. Fund managers specializing in distressed securities investment typically buy the securities of a company at a low, or distressed, price in anticipation that the securities will appreciate when the company emerges from the distressed situation.

Dividend distributions

Payments to unit trust holders of gains realized during the year on securities that the fund has sold at a profit, minus any realized losses.

Dollar-cost averaging

Investing equal amounts of money at regular intervals over time. This technique ensures that an investor buys fewer shares when prices are high and more shares when prices are low. Historically, this has proven to reduce the overall cost of the investment.

Domicile

The country or jurisdiction under which the fund is incorporated.

Downside deviation

Downside deviation measures the variability of returns below a target return or benchmark. For hedge funds that have an absolute return focus, this can be the average negative return over a specified period.

Due diligence

The process of which a fund and its management company is subject to when a potential investor tries to evaluate a fund for investment. This normally involves one or more interviews with the fund manager, understanding the investment strategy and process undertaken by the fund, and a complete review of the offering documentations and the fund structure.

E

Efficient frontier

A graphical representation of both the level of risk and the level of return for any given asset or combination of assets. The efficient frontier is often used to show adding assets to an existing portfolio might change the risk and return characteristics for that portfolio.

Emerging markets

An investment strategy in which the fund manager specializes in investing in equity securities or fixed income securities of companies in the global emerging markets such as India, Indonesia, etc. This investment strategy tends to have a higher correlation to the underlying securities markets since many of the countries do not permit the short sale of securities in their markets.

Emerging markets fund

A unit trust that invests primarily in developing markets in Asia, Latin America, or Eastern Europe. Considered as a higher risk investment in view of size, liquidity, and development cycle of these markets.

Employee contribution

An employee's own investment into the company's MPF or retirement plan. Under MPF, an employee is required to contribute 5% of his/her relevant income up to a maximum of HK$1,000.

Employer contribution

The amount an employer contributes to the employee's MPF or retirement plan. Under MPF, an employer is required to contribute 5% of an employee's relevant income up to a maximum of HK$1,000.

Equity fund

A unit trust that invests in local and/or overseas stocks. The objective is primarily to seek capital growth.

Event driven/special situations

An investment strategy that capitalizes on investment opportunities arising from individual events or special situations that result in short term mispricing of securities. For example, a merger arbitrage fund is an example of an event driven strategy because it relies on an event (in this case, the merger). Fund managers tend to take long positions in positive situations and short positions in negative situations.

F

Fixed income arbitrage

An investment strategy that takes advantage of possible mispricing/distortions in prices of two similar fixed income securities. Typically, the fund manager tracks the relationship between the yield of various fixed income securities and invest when the relationship gets out of line. Various fixed income instruments such as US Treasury bonds, corporate bonds, mortgage backed securities, derivatives, etc. are used.

Fixed-income fund

A fund that seeks current income by investing in fixed-income securities such as bonds.

Front-end fee

A sales commission charged at the time of purchase and paid to the distributors.

Fund manager

The person or persons responsible for making investment decisions of a unit trust or mutual fund.

Fund of Hedge Funds (FoHFs)

A diversified portfolio that generally invests in single hedge funds managed by different fund managers and have different investment strategies.

The SFC's Hedge Funds Guidelines require that a FoHFs must invest in at least five underlying (or baby) funds, with not more than 30% of its total net asset value invested in any single underlying fund.

G

Global fund

A unit trust or mutual fund that invests in securities worldwide.

Growth and income fund

A wide range of investment funds that seeks to make investment gains that are not related to movements in the markets of the underlying securities in which the fund invests.

H

Hedge

An investment technique that aims to offset or mitigate investment risk associated with market movements. For example, a fund manager may seek to hedge the risk of adverse market movements on a portfolio of securities by shorting securities or an index (say through futures or options).

Hedge fund

A wide range of investment funds that seeks to make investment gains that are not related to movements in the markets of the underlying securities in which the fund invests.

Hedge Funds Guidelines

The Hedge Funds Guidelines published by the Securities and Futures Commission have become effective in May 2002 and been incorporated into the Code on Unit Trusts and Mutual Funds. The Guidelines set out rules for funds seeking authorization as hedge funds.

HKIFA

The Hong Kong Investment Funds Association. The professional body that represents the fund management industry in Hong Kong.

High-on-high basis

This refers to the mechanism for computing the performance fee: an investor only pays a performance fee if the investment has appreciated, i.e. the fee will only be paid if the net asset value per unit exceeds the one on which the performance fee was last calculated and paid.

High yield

A strategy where a manager holds low credit quality fixed income instruments to enjoy both the high yields offered by such instruments and the potential for capital appreciation due to credit improvement.

Hurdle rate

The prescribed rate of return that must be achieved by the fund before a hedge fund manager is permitted to charge a performance fee.

I

Income fund

A unit trust or mutual fund that seeks current income rather than capital growth, investing mainly in bonds.

Index fund

A passively managed unit trust or mutual fund that seeks to mirror the performance of a particular market index.

Investment adviser

A person or organization that makes the day-to-day decisions regarding a portfolio's investments, either on behalf of a unit trust or mutual fund (fund manager) or individuals (intermediary).

L

Leverage

An investment technique that involves borrowing money, either to increase the effective size of the portfolio, or in the form of margin purchasing of, for example, futures contracts. Leverage is also known as gearing. Higher leverage usually implies greater exposure, and thus higher risk.

Leverage ratio

The amount of leverage used by a fund as a percentage of the fund assets. For example, if the NAV of a fund is $5,000,000 and it borrows $10,000,000, then the leverage used is 200%.

Limited liability

Under the Hedge Funds Guidelines, the liability of holders must be limited to their investment in the scheme and this should be clearly stated in the offering document.

Where the scheme is a sub-fund of an umbrella fund, the SFC requires ring-fencing of assets between the scheme and other sub-funds within the umbrella structure to prevent a spill-over of excess liabilities.

Long position

It refers to the exposure of a fund that has purchased a security or a futures contract or a call option.

Long/short equity

An investment strategy that seeks to make gains through simultaneous long and short positions in equities or equity derivatives. Long/short equity can be a directional strategy, that is, it exposes the investor to market direction as the fund manager may choose to be have net long positions in markets that they believe will rise in value and net short positions in markets that they believe will fall in value.

M

Macro funds

An investment strategy that seeks to exploit investment opportunities arising from major changes in global economies. Hedge fund managers that employ this strategy base their investment decisions on changes in countries' economic outlook or policies and invest through such instruments as currency derivatives.

Managed futures

A fund that invests in a diversified portfolio of futures contracts.

Market neutral

An investment strategy that seeks to have no exposure to the movements of a traditional investment market such as a stock market. For example, this can be achieved by both buying and shorting equal weightings in similar (but not the same) securities. Fund managers generally attempt to select long positions in undervalued securities and short positions in overvalued securities.

Market timing

An investment strategy that seeks to shift investment capital from one asset class or security with low expected investment returns to another asset class or security that is expected to have better investment returns. Asset classes used include stocks, bonds, mutual funds and money market funds.

Maximum drawdown

It refers to the maximum fall in the value of an investment from its highest value to its lowest value before attaining a new high regardless of whether the decline occurred in consecutive months or not.

Merger arbitrage

An investment technique that aims to capture the difference in the price of the shares of two companies involved in a merger or acquisition. The main premise is that once the merger has been consummated, the stocks of the two companies will become the same stock. Fund managers will often buy shares in the target company and sell short those of the acquiring company.

MPF – Mandatory Provident Fund Scheme

As the second pillar of Hong Kong’s retirement protection framework, MPF provides the workforce in HK with basic retirement protection.

Management Fee

The amount a unit trust or mutual fund pays to its fund manager for the work of overseeing the fund's holdings. Normally charged daily to the fund and reflected in the fund's net asset value.

Mandatory contributions

Mandatory contributions made for an employee are fully and immediately vested in the employee once they are paid into his/her MPF account. Any investment return derived from the mandatory contributions is also fully and immediately vested in that employee.

Mutual fund

An investment company that pools the money of like-minded investors and invests it in a variety of securities with a specific objective.

N

Net Asset Value (NAV)

The market value of a unit trust or mutual fund's total assets, minus liabilities, divided by the number of units or shares outstanding. The value of a single share is called its unit or share price.

O

Offer price

The sales price of a fund which equals the net asset value plus a front end fee, if any.

Offshore fund

A fund which is domiciled outside Hong Kong. Most unit trusts or mutual funds available in Hong Kong are domiciled in overseas jurisdictions such as Luxembourg, Bermuda, or Dublin.

Open-end fund

A fund that has an unlimited number of shares available for purchase.

P

Pension plan

A retirement plan that holds investments of a company's employees for the purpose of providing retirement benefits when the employee retires or leaves the company.

Performance fees

A fee paid to fund managers if the performance of the fund in any one year is above a certain level. Thus if the fund does very well, the manager benefits, giving an incentive to perform. Performance fees are usually charged for funds that invest in very sophisticated instruments, such as hedge funds. Also called incentive fees.

Portfolio

All the securities held by a unit trust or mutual fund or the total investment holdings of an individual or an institution.

Prime broker

It refers to a financial institution that provides services to a hedge fund, including the provision of clearing, custody, margin financing, reporting and stock lending services.

Under the Hedge Funds Guidelines, the prime broker must be a substantial financial institution subject to prudential regulatory supervision.

Prospectus

A legal document that gives prospective investors information about an investment, including its investment objectives and policies, risks, costs, and past performance. Before investing in a unit trust or mutual fund one should read the prospectus.

Put option (or "put")

A put option is an option that gives the holder the right but not the obligation to sell the underlying security usually at a pre-determined price.

R

Redemption

The sale of a fund.

The liquidation or sale of an investment by an investor in a fund that results in the return of the investor's money to the investor.

Redemption fee

A sales fee charged by funds when an investor sells his/her investments in the fund.

Redemption notice period

The period of advance notice that many hedge fund managers require from an investor that intends to redeem their investment in a hedge fund. Unlike traditional funds that do not require a notice period, hedge fund strategies often require more time to unwind their positions and raise cash to return to the investor. The notice period gives the hedge fund manager adequate time to plan the liquidation of his investment positions in an orderly fashion. Typically, notification is required in writing.

Redemption price/bid price

The price at which a unit trust or mutual fund's shares are redeemed, or bought back, by the fund, determined by deducting a redemption fee from the net asset value (NAV) per unit or share.

Regional fund

A unit trust or mutual fund that invests in securities of a particular region such as Europe, Asia etc.

Reinvestment

Use of dividend distribution to buy additional securities. Many unit trust or mutual fund offer the automatic dividend reinvestment option to unitholders.

Risk tolerance

An investor's ability to endure declines in the prices of investments while waiting for them to increase in value.

Risk-adjusted return

A measure of how much risk a fund takes to make its returns. Usually given as a number or a rating. The more return per unit of risk, the better.

S

Sector/theme fund

A fund that concentrates on a relatively narrow market sector, such as technology or healthcare funds. These funds can experience higher share-price volatility than some diversified funds because sector funds are subject to issues specific to a given sector.

Share

A unit of ownership in a mutual fund.

Sharpe ratio

A risk/reward ratio which compares the rate of return with risks required to achieve that return. The higher the ratio, the higher the risk-adjusted return of the fund.

Short position

In the cash market, it refers to a sale of securities not owned by the investor. The securities sold are borrowed from the owner of the security (who is in turn compensated through the payment interest). In the futures market, it refers to the sale of a futures contract; whereas in the options market, it refers to the position of the option writer.

Short selling

An investment strategy based on identifying overvalued securities and selling these securities in the anticipation of being able to repurchase them at later date at a lower price.

Single strategy hedge fund
A hedge fund that engages in a single strategy or a set of sub-strategies that are similar in nature or that require the same skill-set to manage by its manager.

Sortino ratio

The Sortino ratio is similar to the Sharpe ratio except that instead of using standard deviation as a denominator, it uses Downside Deviation. The Sortino ratio was developed to differentiate between "good" and "bad" volatility. If a fund is volatile on the upside (that is, there are a lot of big gains), its Sharpe ratio would still be low. However, investors may consider this a "good" thing. By using downside deviation the Sortino focuses on the "bad" volatility only.

Standard deviation

A statistical measurement of the dispersion of a fund's returns from its mean over a specified time period. It describes how widely returns vary. A higher standard deviation indicates a wider dispersion of past returns.

Stock lending

A loan of a security (like a share) from the legal holder to a borrower. The borrower can then sell the stock as if he owned it but remains liable to the lender for all of the benefits of the stock (such as dividends, etc.). Additionally, the borrower usually pays the lender interest on the value of the stock borrowed. The borrower's strategy is based on his belief that the value of the share will fall below the price at which he is able to sell. This will give him an opportunity to repurchase the share at a lower price to give it back to the lender and allowing the borrower to profit from the difference.

T

Time horizon

The amount of time, usually expressed in years, that an investor expects to hold an investment.

Total return

It is a measure of a fund's investment performance over a specific period of time including reinvested dividends and capital appreciation.

Traditional fund

An investment fund whose return characteristics are tied closely with the return profile of the traditional asset classes that the fund invests in or benchmarked against. For example, a Hong Kong Equity Fund may have a return and risk profile very similar to that of the Hang Seng Index.

Trustee

The party named in a trust or plan who is authorized to hold the assets of the trust or plan for the benefit of the beneficiaries or participants.

U

Unauthorized fund

A unit trust or mutual fund that has not been approved for sale to the general public in Hong Kong by the Securities & Futures Commission.

Unit

A unit of ownership in a unit trust/mutual fund.

Unit trust

A collective investment vehicle that pools the money of like-minded investors and invest into securities with a specific objective. Same as mutual fund.

V

Value

An investment strategy that focuses on purchasing securities of companies which are perceived to be selling at a discount to their intrinsic potential worth, or "undervalued", possibly because the company is out of the favor of the market or analysts. Fund managers believe that investments will appreciate as the market recognizes the "value".

Volatility

The degree of fluctuation in the value of a unit trust or mutual fund, or index, volatility is often expressed as a mathematical measure such as a standard deviation or beta. The greater a fund's volatility, the wider the fluctuations between its high and low prices.

Voluntary contributions

Additional investments in a retirement plan from either the employer or the employee. A common way for people to save more for their retirement nest egg.

W

Warrant fund

A unit trust or mutual fund that invests in warrants - the entitlement to purchase a certain amount of common stock at a set price over a period of time. Normally considered as a high-risk investment.

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24 05 2024 12:55:04pm