The language of institutional alternatives.
A working reference for the terms used across hedge fund research, due diligence, and portfolio analytics — from alpha and drawdown to high-water marks and 13F filings.
13F Filing
A quarterly SEC filing in which institutional managers with over $100M in qualifying U.S. equities disclose their long holdings, revealing positioning with a lag.
Alpha
The portion of a manager’s return that cannot be explained by exposure to the market or to common risk factors. It is the value added by skill, after stripping out beta.
Attribution
The decomposition of a portfolio’s return into its drivers — factor exposures, security selection, allocation, and timing — to understand where performance came from.
AUM
Assets Under Management. The total market value of the capital a manager invests on behalf of clients.
Benchmark
A reference index or blend against which a manager’s performance and risk are measured. A custom benchmark reflects the specific mandate rather than a generic market index.
Beta
A measure of a portfolio’s sensitivity to movements in a reference market. A beta of 1.0 moves in line with the market; below 1.0 is less sensitive, above 1.0 is more.
Capacity
The maximum amount of capital a strategy can manage before its returns degrade. Capacity-constrained strategies often close to new investors.
Capital Introduction
A service, typically from a prime broker, that connects hedge fund managers with prospective institutional investors.
Carried Interest
The share of investment profits paid to a manager as performance compensation, commonly around 20% above a hurdle.
Clawback
A provision allowing investors to reclaim previously paid performance fees if subsequent losses mean the manager was overpaid relative to cumulative results.
Correlation
A statistic from -1 to +1 describing how two return streams move together. Low or negative correlation between holdings is the basis of diversification.
CTA
Commodity Trading Advisor. A manager, usually systematic, that trades futures and options across asset classes — often trend-following (also called Managed Futures).
Drawdown
The decline in value from a portfolio’s peak to its subsequent trough, expressed as a percentage.
Factor Exposure
The degree to which a portfolio’s returns are driven by systematic factors such as equity beta, rate duration, credit spread, value, momentum, or size.
Form 4
An SEC filing disclosing transactions in a company’s securities by its officers, directors, and large shareholders — the basis of insider-transaction data.
Fund of Funds
A vehicle that allocates across multiple underlying hedge funds, offering diversification and manager selection in a single investment.
Gate
A contractual limit on how much capital investors can redeem from a fund in a given period, used to protect the portfolio during stressed conditions.
Global Macro
A strategy that takes directional positions across currencies, rates, equities, and commodities based on macroeconomic views.
Gross Exposure
The sum of a portfolio’s long and short positions as a percentage of capital — a measure of total market engagement and implicit leverage.
Hedge Fund
A privately offered pooled investment vehicle that pursues absolute returns using a wide toolkit — leverage, short selling, and derivatives — typically for institutional and qualified investors.
High-Water Mark
The highest value a fund has previously reached, above which performance fees can again be charged. It ensures investors don’t pay twice for the same gains.
Hurdle Rate
A minimum return a fund must exceed before the manager earns performance fees.
Information Ratio
A manager’s active return divided by tracking error — a measure of risk-adjusted skill relative to a benchmark.
Leverage
The use of borrowed capital or derivatives to increase exposure beyond the capital invested, amplifying both gains and losses.
Liquidity
How quickly a position or fund interest can be converted to cash without materially affecting price. Fund-level liquidity is governed by redemption terms.
Lock-up Period
An initial period during which an investor’s capital cannot be redeemed, giving the manager stable capital to deploy.
Long/Short Equity
A strategy that holds long positions in expected outperformers and short positions in expected underperformers, aiming to profit from relative moves.
Management Fee
A recurring fee, charged as a percentage of assets (commonly ~1–2%), covering the manager’s operating costs regardless of performance.
Market Neutral
A strategy constructed to have near-zero net market exposure, seeking returns from security selection rather than market direction.
Maximum Drawdown
The largest peak-to-trough decline over a period — a key measure of downside risk and capital preservation.
Multi-Strategy
A fund that allocates capital across several distinct strategies and teams, diversifying return sources within one vehicle.
NAV
Net Asset Value. The per-unit value of a fund, equal to assets minus liabilities divided by units outstanding.
Net Exposure
Long exposure minus short exposure, as a percentage of capital — a measure of directional market risk.
Performance Fee
A fee charged on investment profits (commonly ~20%), typically subject to a high-water mark and sometimes a hurdle.
Prime Broker
A bank that provides hedge funds with financing, securities lending, trade execution, and custody services.
Quantitative
An investment approach that uses systematic, model-driven rules and data to select and size positions, as opposed to discretionary judgement.
Redemption
The withdrawal of capital from a fund by an investor, subject to notice periods, lock-ups, and gates.
Separately Managed Account
An SMA is a portfolio managed for a single investor in their own account, offering transparency, control, and customised terms versus a commingled fund.
Sharpe Ratio
Excess return over the risk-free rate divided by volatility — the most common measure of risk-adjusted return.
Side Letter
A separate agreement granting a specific investor terms that differ from the standard fund documents, such as fee discounts or enhanced reporting.
Side Pocket
A mechanism to segregate illiquid or hard-to-value holdings from the main portfolio so they don’t affect ongoing subscriptions and redemptions.
Sortino Ratio
A variant of the Sharpe ratio that measures return against downside volatility only, penalising harmful volatility rather than all of it.
Tracking Error
The volatility of a portfolio’s returns relative to its benchmark — a measure of how actively and how differently it is managed.
UCITS
A European regulatory framework for funds offering daily liquidity and investor protections, used to access regulated hedge fund strategies.
Value at Risk
VaR estimates the maximum expected loss over a given horizon at a given confidence level — e.g. a 1-day 95% VaR.
Volatility
The standard deviation of returns — the most common measure of how much a portfolio’s value fluctuates.