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Correlation
Indicates the strength of relationship between two variables (fund/index or fund A/fund B). It ranges from Ð1 to +1.
A correlation of +1 indicates a perfect positive relationship i.e. 100% of the fund fluctuations depend on the index fluctuations. A correlation of Ð1 indicates a perfect negative relationship. 0 indicates no relationship. It is important to note that correlation is not a mathematical linear relationship and is only based on historical data.
Leverage
Represents the ratio of money borrowed divided by capital of the fund. If the capital is 100 and if the borrowed money is 200, the leverage will be 200% or two times the capital or 2:1. As leverage can be calculated in a variety of ways, it is important to define it with each fund manager.
Long Position
Results from the purchase of a security, which creates an exposure to this security.
Market Neutral
Can describe the fact that a portfolio is truly hedged and derives no performance impact from the market rising or falling. This is a term that is used widely in the market but we feel there are very few fund managers to whom it can actually be applied.
Net Market Exposure
Calculated by deducing the value of the short positions from the long positions.
Performance Fee
A fee typically taken by hedge funds based on their performance over a defined period of time. It is usually set between 15% and 20% and charged in addition to management fees.
Sharpe ratio
A measure of risk-adjusted return which can be useful in comparing one fundÕs consistency of returns to another as long as they are investing in the same area. The formula is the average rolling 12-months return minus the rate of a risk-free investment divided by the standard deviation. The higher the ratio, the greater is the return per unit of risk. Risk-free rate used is usually the 3-months Treasury-Bill rate.
Short selling
Selling borrowed securities, which are perceived to trade at prices above fair value. The fund manager sells securities expecting that their prices will fall which enables him to buy them back later at a lower price. If the price of the securities is above the price at which the sale took place, the manager will then lose that difference of money plus the cost of borrowing.
Sortino ratio
A measure of downside risk-adjusted return. The formula is the average rolling 12-months return minus the rate of a free-risk investment divided by the downside deviation. The downside deviation measures the volatility of the monthly return below the mean, therefore it does not penalise upside volatility. The higher the ratio, the greater is the return per unit of risk. Risk-free rate used is usually the 3-months Treasury-Bill rate.
Volatility
The amount and speed of an asset price movement regardless of its direction. Historical volatility can be mathematically calculated as the standard deviation of any given sets of returns. Standard deviation measures how an asset return is distributed around the mean.
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