Asset Management terms
- 76
- terms
Recruiting15
- Buy side
- Firms that invest money: private equity, hedge funds, asset managers, private credit, and venture capital. They buy the securities, research, and services the sell side offers.ExampleA sell-side analyst publishes a buy rating on a retailer. A buy-side analyst at a mutual fund reads it, builds her own model, and decides whether to put $50m of the fund's money into the stock.See also Sell side, Private equity, Hedge fund
- Coffee chat (informational interview)
- A short call or meeting, usually 15 to 30 minutes, with someone at a firm to learn about their job. It is the core of networking, and a good one ends with a referral or another name to contact.ExampleA sophomore emails a second-year analyst from her school, gets 20 minutes on Thursday, asks three questions about the group, sends a thank-you that night, and is introduced to a VP the next week.See also Networking, Fit interview
- Diversity program
- An early insight program or internship track for students from underrepresented groups. Many open earlier than the main summer analyst program, some to freshmen and sophomores, and some lead straight to an internship offer.ExampleA bank's sophomore diversity program takes applications in the fall, runs a two-day event in spring, and gives strong participants an early interview for the junior summer analyst class.See also Sophomore program, Summer analyst
- Fit interview (behavioral interview)
- The questions about you: walk me through your resume, why this firm, why this path, a time you led or failed. Every finance process has them, and weak answers sink otherwise strong technical candidates.ExampleWhy investment banking? A strong answer names something you did (a valuation for your investment club), what you liked about the work, and why this seat gives you more of it.See also Technical interview, Superday, HireVue
- HireVue
- A recorded video interview platform. You see a question, get a short time to prepare, often about 30 seconds, then answer on camera within a time limit. Many banks use it as the first screen after the application.ExampleTell me about a time your team disagreed. You get 30 seconds to think, two minutes to answer, and one take before the next question appears.See also Fit interview, Online assessment, Superday
- Networking
- Building relationships with people at firms through emails, coffee chats, and events, so someone knows your name when applications open. It matters more in finance than in most industries, especially from schools where banks do not recruit on campus.ExampleTwenty emails in September lead to eight calls, and two of those turn into referrals. When the program opens in January, two people at the firm can put your name forward.See also Coffee chat, On-campus recruiting
- On-campus recruiting (OCR)
- The process where firms post jobs and interview through your school's career center. Schools where firms recruit heavily get the most slots; elsewhere, networking and direct applications carry more weight.ExampleAt a school with OCR, a bank posts its role on the career portal, collects resumes, and runs first rounds in campus interview rooms. At a school without it, you apply online and lean on referrals.See also Networking, Summer analyst
- Online assessment (OA)
- A timed online test sent after you apply: numerical reasoning, logic games, or personality questions for banks, and math or coding problems for quant roles.ExampleA bank's online assessment gives you 20 minutes for 18 numerical questions, such as working out a company's year-on-year revenue growth from a bar chart.See also HireVue, Superday
- Return offer
- A full-time job offer given to an intern at the end of the summer. At most banks it is the main path into a full-time analyst job, so the internship works like a ten-week interview.ExampleA class of 80 summer analysts is reviewed in August. 65 return offers is an 81% rate, and the 15 without one recruit again in the fall.See also Summer analyst, Exploding offer
- Rolling admissions (rolling applications, rolling basis)
- Reviewing applications as they arrive and filling seats before the posted deadline. Applying in the first week or two after a program opens can matter more than the deadline itself.ExampleA program opens January 10 with a March 1 deadline. If most interview slots fill by mid-February, an application sent February 20 arrives after most of the decisions are made.See also Summer analyst, Online assessment
- Sophomore program
- An early program for second-year students, such as an insight week, a spring program, or a sophomore internship. Some feed directly into the junior summer analyst process, which now recruits a year or more ahead.ExampleA bank runs a three-day spring insight program for 60 sophomores. Strong participants get fast-tracked into interviews for the junior summer analyst class.See also Diversity program, Summer analyst
- Stock pitch
- A recommendation to buy or short a stock, backed by a thesis, a valuation, catalysts, and risks. It is the core interview task for hedge fund, asset management, and equity research roles. Have two ready: one long and one short.ExampleLong a regional bank at $40: it trades at 8x earnings versus peers at 11x, and cheaper deposits are the catalyst. At 10x the stock is $50, 25% upside; the risk is commercial real estate losses.See also Long/short equity, Comparable companies analysis
- Summer analyst
- The standard 10-week internship at banks and many funds, held the summer between junior and senior year. Recruiting for it now starts during sophomore year.ExampleA student in the class of 2029 interns as a summer analyst in summer 2028, between junior and senior year, after applying during sophomore year.See also Return offer, Sophomore program, Superday
- Superday
- The final round: several back-to-back interviews in one day, in person or virtual, mixing fit and technical questions. Offers often come within a few days.ExampleFour 30-minute interviews back to back: an MD on fit, a VP on a DCF walk-through, an associate on accounting, and an analyst on why this group. The offer call comes two days later.See also Fit interview, Technical interview, HireVue
- Technical interview
- Questions that test finance knowledge: accounting, valuation, DCF, and LBO for banking and PE; markets for trading; probability and mental math for quant. Expect prompts like walk me through a DCF, or how does $10 of depreciation flow through the three statements.ExampleDepreciation rises $10 at a 25% tax rate. Net income falls $7.50; cash rises $2.50 after adding back the $10; PP&E falls $10; assets fall $7.50 and so does retained earnings.See also Fit interview, Discounted cash flow, Paper LBO
Markets and macro14
- Basis point (bps)
- One hundredth of a percentage point, or 0.01%. A rate that moves from 4.25% to 4.50% has risen 25 basis points.ExampleA loan priced at SOFR + 350 bps with SOFR at 4.30% pays 7.80%. On a $100m loan, each basis point is worth $10,000 a year.See also DV01, Credit spread
- Bull and bear markets (bull market, bear market)
- A bull market is a sustained rise in prices. A bear market is commonly defined as a fall of 20% or more from a recent high.ExampleAn index peaks at 5,000 and falls to 3,900, a 22% drop, so it is in a bear market. A fall to 4,200, 16%, would only be a correction.See also Risk-on and risk-off, VIX
- Consumer price index (CPI)
- The monthly government measure of price changes for a basket of consumer goods and services, the headline US inflation number. Core CPI leaves out food and energy. The Fed's 2% target is set on a related index, PCE.ExampleCPI moving from 300.0 to 309.0 over a year is 3.0% inflation. If core CPI rose 3.5% over the same year, food and energy prices rose more slowly than everything else.See also Federal Open Market Committee, Hawkish and dovish, Federal funds rate
- Federal funds rate (fed funds)
- The overnight rate at which banks lend reserves to each other, which the Federal Reserve steers within a target range. It anchors short-term borrowing costs across the economy.ExampleThe FOMC cuts the target range from 4.25% to 4.50% down to 4.00% to 4.25%. Loans priced off SOFR reset about 25 bps lower within days, and money market fund yields follow.See also Federal Open Market Committee, Secured Overnight Financing Rate, Yield curve
- Federal Open Market Committee (FOMC)
- The Fed committee that sets the federal funds target range. It meets eight times a year, and traders read the statement, the press conference, and the dot plot of members' rate projections closely.ExampleThe statement leaves the target range at 4.00% to 4.25%, but the dot plot shows two cuts next year instead of three. Two-year yields rise as traders price fewer cuts.See also Federal funds rate, Hawkish and dovish, Quantitative easing
- Gross domestic product (GDP)
- The total value of goods and services produced in a country over a period. US GDP is reported quarterly as an annualized growth rate. Two negative quarters in a row is common shorthand for a recession, though not the official definition.ExampleReal GDP grows 0.5% in a quarter. The headline reports it annualized, about 2.0%, since 1.005 to the fourth power is about 1.020.See also Nonfarm payrolls, Consumer price index
- Hawkish and dovish (hawkish, dovish)
- Hawkish means leaning toward higher rates to fight inflation; dovish means leaning toward lower rates to support growth and jobs. Markets react to small shifts in a Fed official's tone.ExampleA Fed governor says inflation is still too high and the Fed may need to do more. That is hawkish, and two-year Treasury yields can rise a few basis points within minutes.See also Federal Open Market Committee, Federal funds rate, Consumer price index
- Inverted yield curve
- When short-term Treasury yields are above long-term ones, for example the 2-year yielding more than the 10-year. It has come before most US recessions, though the lag is long and varies.ExampleThe 2-year Treasury yields 4.8% and the 10-year yields 4.2%, so the 2s10s spread is -60 bps. The curve is inverted.See also Yield curve, Treasury securities
- Nonfarm payrolls (NFP, jobs report)
- The monthly count of US jobs added outside farming, published by the Bureau of Labor Statistics, usually on the first Friday of the month. It is one of the biggest scheduled market-moving releases.ExampleEconomists expect 150,000 jobs and the report shows 250,000. Traders read a stronger economy and fewer rate cuts, and Treasury yields jump seconds after the 8:30 a.m. Eastern release.See also Gross domestic product, Federal Open Market Committee
- Quantitative easing (QE)
- A central bank buying large amounts of government bonds and mortgage securities to push long-term rates down when short-term rates are already near zero. Shrinking those holdings again is called quantitative tightening.ExampleA central bank buys $80bn of Treasuries a month. With fewer bonds left for everyone else, prices rise and long-term yields fall, which pulls mortgage rates down too.See also Federal Open Market Committee, Treasury securities, Yield curve
- Risk-on and risk-off (risk-on, risk-off)
- Shorthand for market mood. Risk-on means investors are buying stocks, high-yield bonds, and emerging markets; risk-off means they are moving into Treasuries, the dollar, gold, or the yen.ExampleOn a risk-off day, the S&P 500 falls 2%, high-yield spreads widen 25 bps, the 10-year Treasury yield drops 10 bps, and the yen strengthens.See also VIX, Bull and bear markets
- Secured Overnight Financing Rate (SOFR)
- The benchmark US overnight rate, based on Treasury repo trades and published by the New York Fed. It replaced LIBOR, so most US floating-rate loans now pay SOFR plus a spread.ExampleA leveraged loan pays SOFR + 3.25%. With SOFR at 4.30% the borrower pays 7.55%; if SOFR falls to 3.80%, the rate drops to 7.05% with no new paperwork.See also Repo, Interest rate swap, Federal funds rate
- Treasury securities (Treasuries)
- Debt issued by the US government: bills (one year or less), notes (2 to 10 years), and bonds (20 and 30 years). Their yields are the risk-free benchmark most other assets are priced against.ExampleA 3-month bill bought at $98.90 pays $100 at maturity: $1.10 of interest, about 4.4% a year. A 10-year note pays a coupon every six months instead and returns its face value at maturity.See also Yield curve, Credit spread, Duration
- Yield curve
- A chart of Treasury yields across maturities, from one month to 30 years. It normally slopes upward because lenders want more return for locking money up longer.ExampleThe 2-year at 3.5%, the 10-year at 4.2%, and the 30-year at 4.7% make a normal, upward-sloping curve. The 10-year minus the 2-year, 70 bps, is the 2s10s spread traders quote.See also Inverted yield curve, Treasury securities, Federal funds rate
Accounting11
- Accrual accounting
- Recording revenue when it is earned and expenses when they are incurred, not when cash changes hands. It is the reason net income and cash flow differ, and the reason the cash flow statement exists to reconcile them.ExampleA consultant finishes a $50k project in December and is paid in February. The $50k is December revenue; the cash arrives in February, when receivables fall by the same amount.See also Net income, Cash flow statement, Deferred revenue
- Amortization
- The charge that spreads the cost of an intangible asset, such as an acquired customer list or patent, over its useful life. Like depreciation, it lowers net income but uses no cash, so it is added back on the cash flow statement.ExampleAn acquirer books a $50m customer list with a 10-year life. Each year it records $5m of amortization: pre-tax income falls $5m, and the $5m is added back on the cash flow statement.See also Depreciation, Goodwill, EBITDA
- Balance sheet
- A snapshot of what a company owns (assets), what it owes (liabilities), and what is left for shareholders (equity) on one date. It always balances: assets = liabilities + shareholders' equity.ExampleA company with $500m of assets and $300m of liabilities has $200m of shareholders' equity. Borrow $50m of cash and assets go to $550m, liabilities to $350m, and equity stays at $200m.See also Income statement, Cash flow statement, Goodwill
- Capital expenditures (capex, CapEx)
- Cash spent buying or upgrading long-lived assets like plants, equipment, or servers. It shows up in investing activities on the cash flow statement and as PP&E on the balance sheet, then reaches the income statement slowly through depreciation.ExampleA manufacturer spends $30m on a new production line with a 10-year life. Investing cash flow shows -$30m this year, PP&E rises $30m, and the income statement takes $3m of depreciation a year for ten years.See also Depreciation, Unlevered free cash flow, Cash flow statement
- Cash flow statement
- Shows how cash actually moved during a period, split into operating, investing, and financing activities. It starts from net income, adds back non-cash charges like depreciation, adjusts for working capital, and ends with the change in cash.ExampleNet income of $80m, plus $20m of D&A, minus a $15m increase in working capital, gives $85m of operating cash flow. Subtract $40m of capex and $10m of debt repaid, and cash rises $35m.See also Income statement, Balance sheet, Net working capital
- Depreciation
- Spreading the cost of a physical asset over its useful life. A $1,000 machine with a five-year life and no salvage value creates $200 of straight-line depreciation a year, which reduces taxable income without using any cash.ExampleA $10m truck fleet with a four-year life and $2m of salvage value creates ($10m - $2m) / 4 = $2m of straight-line depreciation a year. At a 25% tax rate, that saves $0.5m of cash taxes each year.See also Capital expenditures, Amortization, EBITDA
- EBITDA
- Earnings before interest, taxes, depreciation, and amortization: operating income with D&A added back. It is a rough proxy for operating cash flow that ignores how the company is financed, and the denominator in most valuation and leverage multiples. It ignores capex and working capital, so it is not free cash flow.ExampleRevenue of $100m and operating costs of $60m, including $10m of D&A, give operating income of $40m. Add back the $10m of D&A and EBITDA is $50m.See also Operating income, EV/EBITDA multiple, Leverage ratio
- Gross margin
- Revenue minus the direct cost of making or delivering what was sold (cost of goods sold), as a share of revenue. It shows how much each sale leaves to pay for everything else: sales, research, overhead, interest, and tax.ExampleRevenue of $100m and cost of goods sold of $60m leave $40m of gross profit, a 40% gross margin. A software business might run 75%; a grocer nearer 25%.See also Income statement, Operating income, Unit economics
- Income statement
- Revenue minus expenses over a period. The usual order runs revenue, cost of goods sold, gross profit, operating expenses, operating income, interest, taxes, and finally net income.ExampleRevenue $200m, COGS $120m, gross profit $80m. Less $40m of operating expenses leaves $40m of operating income; less $10m of interest and 25% tax on the $30m left, net income is $22.5m.See also Net income, Operating income, Balance sheet
- Net income
- The bottom line: what is left for shareholders after every expense, interest payment, and tax. It flows into retained earnings on the balance sheet and is the first line of the cash flow statement.ExampleA company earns $30m of net income and pays $10m of dividends, so retained earnings rise $20m. Its cash flow statement still starts from the full $30m.See also Income statement, Price-to-earnings ratio, Cash flow statement
- Operating income (EBIT)
- Revenue minus all operating expenses, including depreciation and amortization, before interest and taxes. It measures what the core business earns regardless of how it is financed.ExampleTwo companies each earn $60m of operating income. One has no debt and the other pays $20m of interest, so their net income differs, but their businesses earned the same.See also EBITDA, Income statement, Unlevered free cash flow
Valuation9
- Beta
- How much a stock tends to move relative to the market. A beta of 1.2 means the stock has historically moved about 1.2% for each 1% move in the market. It feeds the cost of equity through CAPM.ExampleA stock with a beta of 0.8 would be expected to rise about 4% when the market rises 5%. Utilities often sit below 1; fast-growing tech names often sit above it.See also Capital asset pricing model, Cost of equity, Alpha
- Capital asset pricing model (CAPM)
- A formula for the return equity investors require: cost of equity = risk-free rate + beta x equity risk premium. With a 4% risk-free rate, a beta of 1.2, and a 5% premium, the cost of equity is 4% + 6% = 10%.ExampleWith a 4.5% risk-free rate, a beta of 0.9, and a 5.5% equity risk premium, cost of equity = 4.5% + 0.9 x 5.5% = 4.5% + 4.95% = 9.45%.See also Beta, Cost of equity, Weighted average cost of capital
- Cost of equity
- The annual return shareholders expect for owning a company's stock, usually estimated with CAPM. It is higher than the cost of debt because shareholders are paid last and dividends, unlike interest, are not tax deductible.ExampleA company borrows at 6%, or 4.5% after a 25% tax rate, while its cost of equity is 10%. Shareholders take more risk, get paid last, and give the company no tax deduction.See also Capital asset pricing model, Weighted average cost of capital, Beta
- Discounted cash flow (DCF)
- Valuing a business as the present value of the cash it will generate. You project unlevered free cash flow for about five to ten years, estimate a terminal value, and discount both back at WACC to get enterprise value.ExampleFive years of free cash flow worth $200m today plus a terminal value worth $300m today give an enterprise value of $500m. Subtract $100m of net debt for an equity value of $400m.See also Unlevered free cash flow, Terminal value, Weighted average cost of capital, Enterprise value
- Enterprise value (EV, TEV)
- The value of the whole operating business to every capital provider. Simplified: EV = equity value + debt + preferred stock + noncontrolling (minority) interest - cash. It pairs with metrics that belong to all investors, like revenue and EBITDA.ExampleEquity value of $800m, plus $300m of debt, plus $50m of preferred stock, minus $150m of cash gives an enterprise value of $1,000m.See also Equity value, EV/EBITDA multiple, Discounted cash flow
- Equity value (market capitalization, market cap)
- The value of a company that belongs to common shareholders. For a public company it is the share price times diluted shares outstanding. It pairs with metrics measured after interest, like net income and earnings per share.ExampleA company with 50m diluted shares at $30 has an equity value of $1.5bn. With $40m of net income, it trades at 37.5x earnings.See also Enterprise value, Treasury stock method, Price-to-earnings ratio
- EV/EBITDA multiple (EV/EBITDA)
- Enterprise value divided by EBITDA, the most common multiple in banking. A company with $500 million of EV and $50 million of EBITDA trades at 10.0x. Because both sides ignore capital structure, companies with different debt levels compare cleanly.ExampleTwo peers each have $100m of EBITDA. One has $900m of equity and no debt, the other $500m of equity and $400m of net debt. Both have an EV of $900m and trade at 9.0x.See also Enterprise value, EBITDA, Comparable companies analysis
- Price-to-earnings ratio (P/E, P/E ratio)
- Share price divided by earnings per share, or equally equity value divided by net income. A $50 stock with $2.50 of EPS trades at 20x. Leverage and tax rates affect it, so it compares best across similar companies.ExampleNet income of $200m on 100m shares is EPS of $2.00. At a $36 share price the P/E is 18x, and equity value of $3.6bn over $200m of net income gives the same 18x.See also Equity value, Net income, Comparable companies analysis
- Weighted average cost of capital (WACC)
- The blended return required by all of a company's capital providers: WACC = E/(D+E) x cost of equity + D/(D+E) x cost of debt x (1 - tax rate). It is the discount rate for unlevered free cash flow in a DCF.Example70% equity at a 10% cost and 30% debt at 6% pre-tax with a 25% tax rate: WACC = 0.7 x 10% + 0.3 x 4.5% = 7.0% + 1.35% = 8.35%.See also Cost of equity, Capital asset pricing model, Discounted cash flow, Unlevered free cash flow
Trading and products8
- Convexity
- How much a bond's duration changes as yields move, the curve in the price and yield relationship. A plain bond has positive convexity: it gains more when yields fall than it loses when they rise by the same amount.ExampleA bond with a duration of 10 and positive convexity might gain about 10.6% when yields fall 1% and lose only about 9.4% when they rise 1%. Duration alone predicts 10% both ways.See also Duration, DV01
- Duration (modified duration)
- A bond's sensitivity to interest rates: the approximate percent price change for a one percentage point move in yield. A bond with a duration of 7 falls about 7% if yields rise 1%.ExampleA $20m bond position with a duration of 5 loses about $1m if yields rise 1%, and gains about $200,000 if they fall 20 bps.See also DV01, Convexity, Treasury securities
- DV01 (PV01)
- Dollar value of a basis point: how many dollars a position gains or loses when yields move 0.01%. A $10 million bond position priced at par with a duration of 7 has a DV01 of about $10,000,000 x 7 x 0.0001 = $7,000.ExampleA trader is long $50m of 10-year notes with a DV01 of $42,000. A 5 bp fall in yields makes about 5 x $42,000 = $210,000.See also Duration, Basis point, Hedging
- Futures contract (futures)
- A standardized, exchange-traded agreement to buy or sell an asset at a set price on a future date. Gains and losses settle daily through margin, which makes futures cheap to trade and convenient for hedging.ExampleBuy one crude oil contract, 1,000 barrels, at $70. If it settles at $72 that day, $2,000 goes into your margin account; if it settles at $68, $2,000 comes out.See also Hedging, Repo
- Hedging
- Taking an offsetting position to reduce a risk you do not want. A trader who owns a corporate bond can sell Treasury futures so that a rate move hits both sides and roughly cancels, leaving mostly the credit risk.ExampleAn airline will buy 10m gallons of jet fuel in six months and fears a price rise. It buys fuel futures today; if prices climb $0.50 a gallon, the futures gain about $5m to offset the higher bill.See also Delta, DV01, Futures contract
- Interest rate swap
- A contract to exchange fixed-rate interest payments for floating-rate ones on a notional amount. A company with a SOFR-based loan can pay fixed and receive floating on a swap to lock in its borrowing cost.ExampleA company with a $100m loan at SOFR + 2% enters a swap where it pays 3.8% fixed and receives SOFR. The SOFR legs cancel, so its all-in cost is locked at 5.8% whatever SOFR does.See also Secured Overnight Financing Rate, DV01, FICC
- Repo (repurchase agreement)
- A short-term secured loan: one side sells a security, usually a Treasury, and agrees to buy it back later at a slightly higher price. The difference is the interest. Repo is how dealers and funds finance their positions.ExampleA fund sells $100m of Treasuries to a dealer and agrees to buy them back tomorrow for $100,012,000. The $12,000 is one day of interest, about 4.3% a year on a 360-day basis.See also Secured Overnight Financing Rate, Treasury securities
- Short selling (shorting)
- Borrowing a stock, selling it, and buying it back later to return it, profiting if the price falls. Losses have no ceiling, because the price can keep rising.ExampleShort 1,000 shares at $50 and you receive $50,000. Buy them back at $40 and you keep $10,000 before borrow costs; if the stock goes to $90 instead, you lose $40,000.See also Long/short equity, Hedging
Funds and investing8
- Activist investing
- Buying a meaningful stake in a public company and pushing for change, such as new directors, a sale, a spinoff, or a buyback. Elliott and Starboard are well-known activists.ExampleAn activist buys 6% of a conglomerate trading below the value of its parts, then pushes for a spinoff of its fastest-growing division and two seats on the board.See also Hedge fund, Event-driven investing
- Assets under management (AUM)
- The total market value of money a firm manages for its clients. It is the usual measure of an asset manager's or fund's size, and management fees are often charged on it.ExampleA manager with $50bn of AUM charging 0.5% earns $250m of fees a year. If markets fall 20%, AUM drops to $40bn and fees to $200m without a single client leaving.See also Management fee, Hedge fund
- Exchange-traded fund (ETF)
- A fund that holds a basket of securities and trades on an exchange like a single stock. Most track an index at low cost, such as an S&P 500 fund.ExampleAn S&P 500 ETF with a 0.03% expense ratio costs $3 a year on $10,000 invested, and you can buy or sell it at any point in the trading day like a single stock.See also Assets under management
- General partner (GP)
- The firm that manages a private fund: it makes the investments and earns the management fee and carried interest. GPs also put in some of their own money, often 1% to 5% of the fund.ExampleA GP raising a $2bn fund commits 2%, or $40m, of its partners' own money alongside the LPs, charges the management fee, and makes every investment decision.See also Limited partner, Carried interest, Management fee
- Hedge fund
- A private investment fund for institutions and wealthy investors that can go long and short, use leverage, and trade nearly anything. Common styles include long/short equity, macro, credit, event-driven, and quant.ExampleA $1bn long/short fund holds $1.2bn of longs and $800m of shorts: 200% gross and 40% net exposure. A 10% market fall costs it about 4% before any stock picking.See also Long/short equity, Global macro, Multi-manager platform
- Limited partner (LP)
- An investor in a private fund, such as a pension, endowment, sovereign wealth fund, or family office. LPs commit capital and pay fees but do not choose the investments.ExampleA state pension commits $100m to a buyout fund. It wires money when called, gets quarterly reports, and receives distributions as companies are sold, but has no vote on what the GP buys.See also General partner, Capital call, Hurdle rate
- Long/short equity (long/short)
- Buying stocks you expect to outperform and shorting ones you expect to lag, so returns depend more on stock picking than on the market's direction. It is one of the most common hedge fund strategies.ExampleLong $10m of a stronger retailer and short $10m of a weaker one. The sector sells off: the long falls 8% (-$0.8m), the short falls 15% (+$1.5m), and the pair makes $0.7m in a down market.See also Short selling, Hedge fund, Stock pitch
- Management fee (2 and 20)
- The annual fee a fund charges on assets or committed capital to cover salaries and costs, traditionally 2%. Paired with 20% carried interest or performance fee, that is the classic 2 and 20.ExampleOn a $1bn fund, a 2% management fee is $20m a year whether returns are good or bad. Carry at 20% only pays once profits clear the hurdle.See also Carried interest, Assets under management, General partner
Quant5
- Alpha
- Return beyond what market exposure or a benchmark explains. A fund that earns 12% when its beta-adjusted benchmark earns 9% has about 3% of alpha.ExampleA fund with a beta of 1.2 earns 14% when the market returns 10% and the risk-free rate is 4%. Its expected return is 4% + 1.2 x 6% = 11.2%, so its alpha is 2.8%.See also Beta, Sharpe ratio, Factor
- Correlation
- A number from -1 to 1 for how closely two quantities move together. Below 1, combining assets lowers portfolio risk, which is the arithmetic behind diversification.ExampleTwo assets each with 20% volatility, held 50/50 with zero correlation, give a portfolio volatility of the square root of (0.25 x 0.04 + 0.25 x 0.04), about 14.1%, not 20%.See also Standard deviation, Beta, Linear regression
- Factor
- A characteristic that helps explain returns across many securities, such as value, momentum, size, or quality. Factor models split a portfolio's return into factor exposures plus what is left over, which is the alpha.ExampleA portfolio returns 9%. A factor model attributes 6% to the market, 1.5% to a tilt toward value stocks, and 1% to momentum, which leaves 0.5% of alpha.See also Alpha, Statistical arbitrage
- Standard deviation (variance)
- How widely outcomes spread around their average: the square root of the variance, which is the average squared distance from the mean. For returns it is what traders call volatility, and it scales with the square root of time.ExampleA stock with a 1% daily standard deviation has about 1% x the square root of 252, or roughly 16%, annual volatility.See also Correlation, Sharpe ratio, Implied volatility
Credit and restructuring3
- Credit rating (investment grade)
- A grade from an agency such as S&P, Moody's, or Fitch on how likely a borrower is to default. BBB- at S&P (Baa3 at Moody's) and above is investment grade; anything lower is high yield.ExampleAn issuer cut from BBB- to BB+ falls out of investment grade. Funds that may hold only investment grade bonds have to sell, and its spread can widen sharply in days.See also High-yield bond, Credit spread
- Credit spread
- The extra yield a bond pays over a Treasury of similar maturity, to compensate for default risk and lower liquidity. A corporate bond yielding 6.5% when the matching Treasury yields 4.5% has a 200 basis point spread.ExampleA five-year BB bond yields 7.25% while the five-year Treasury yields 4.00%: a 325 bp spread. If spreads tighten 50 bps with Treasuries unchanged, the bond yields 6.75%.See also Basis point, Credit rating, Yield to maturity
- Yield to maturity (YTM)
- The annual return a bondholder earns buying at today's price and holding to maturity, assuming every payment is made. Price and yield move in opposite directions, so a bond bought below par yields more than its coupon.ExampleA one-year bond with a 5% coupon trades at 98 and pays 105 at maturity. Its yield to maturity is 105 / 98 - 1, about 7.1%, above the coupon because it was bought below par.See also Credit spread, Duration, Distressed debt
M&A and deals1
- Initial public offering (IPO)
- A private company's first sale of shares to the public on a stock exchange. The underwriting banks market the deal to investors, build the order book, set the price, and allocate the shares.ExampleA company sells 20m shares at $25, raising $500m. With a 6% underwriting spread, the banks keep $30m and the company receives $470m before legal and other fees.See also Underwriting, Follow-on offering
LBOs and private equity1
- Hurdle rate (preferred return)
- The minimum annual return, often 8%, that a fund's limited partners receive before the general partner earns carried interest.ExampleLPs commit $100m with an 8% hurdle. Before the GP earns any carry on a five-year deal, they need back about $147m, since 1.08 to the fifth power is about 1.47.See also Carried interest, Limited partner, Internal rate of return
Venture and startups1
- TVPI and DPI (TVPI, DPI)
- Two fund performance multiples. DPI (distributions to paid-in) is the cash returned to investors divided by what they paid in. TVPI (total value to paid-in) adds the estimated value of what the fund still holds. DPI is realized; TVPI is partly on paper.ExampleInvestors paid in $100m, have received $40m, and the remaining holdings are marked at $110m: DPI is 0.4x and TVPI is 1.5x.See also Multiple of invested capital, Internal rate of return, Limited partner