Hedge Funds terms

80
terms

Accounting15

Accounts receivable: Money customers owe the company for products or services already delivered and billed. It sits in current assets. When it rises, revenue was booked but the cash has not arrived yet, so operating cash flow falls by the increase.ExampleA company books $40m of December sales but collects only $30m by year end. Receivables rise $10m, so cash from operations comes in $10m below the profit those sales produced.See also Net working capital, Accrual accounting, Cash flow statement
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
Deferred revenue: Cash a customer paid before the company delivered, like an annual software subscription billed up front. It starts as a liability and becomes revenue month by month as the service is provided.ExampleA customer prepays $1,200 in January for a year of software. Deferred revenue starts at $1,200, and $100 moves to revenue each month, so $600 is left on the balance sheet after June.See also Accrual accounting, 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
Levered free cash flow (LFCF, free cash flow to equity, FCFE): Cash left for shareholders after operating costs, taxes, interest, reinvestment, and required debt repayment. It drives an LBO's debt paydown and a dividend's safety. Unlevered free cash flow is the same idea before interest and debt payments.ExampleCash from operations of $50m (already after interest), $15m of capex, and $10m of required debt repayment leave $25m of levered free cash flow.See also Unlevered free cash flow, Cash flow statement, Leveraged buyout
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
Stock-based compensation (SBC): Pay given to employees in shares or options instead of cash. It is an expense on the income statement but added back on the cash flow statement as non-cash. Many investors still treat it as a real cost because it dilutes shareholders.ExampleA software company grants $40m of stock to employees in a year. Operating income falls $40m, cash from operations adds the $40m back, and existing shareholders are diluted by the new shares.See also Cash flow statement, Treasury stock method

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
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
VIX: Cboe's index of expected 30-day volatility in the S&P 500, calculated from option prices. It tends to jump when stocks fall, which is why people call it the fear gauge.ExampleA VIX of 16 means options price the S&P 500 to move about 16% a year, or roughly 1% a day, since 16 divided by the square root of 252 trading days is about 1.See also Implied volatility, Risk-on and risk-off
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

Quant12

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
Arbitrage: Locking in a riskless profit from prices that are inconsistent with each other, by buying the cheap side and selling the rich one at the same time. True arbitrage is rare and quickly competed away; most trades called arbitrage carry some risk.ExampleA share trades at $40.00 on one exchange and $40.05 on another. Buying on the first and selling on the second locks in $0.05 a share before fees.See also Statistical arbitrage, Put-call parity, Market maker
Backtest: Running a trading strategy on historical data to see how it would have done. Useful, but easy to fool yourself with: trading costs, slippage, and data you would not have had at the time all have to be handled honestly.ExampleA strategy backtests at 12% a year before costs but turns over its whole book every day. At 3 bps of cost per turnover, 250 trading days cost 7.5% a year, and most of the edge is gone.See also Overfitting, Sharpe ratio
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
Expected value: The probability-weighted average outcome. A bet that pays $10 with probability 0.3 and nothing otherwise has an expected value of $3. Quant interviews test it constantly with dice, cards, and betting games.ExampleRoll one die and get paid the number in dollars: the expected value is (1 + 2 + 3 + 4 + 5 + 6) / 6 = $3.50. Pay $3 to play and you have a 50 cent edge per roll.See also Kelly criterion, Market-making game
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
Linear regression (regression): Fitting a straight line y = a + b x to data by minimizing the sum of squared errors. The slope b says how much y moves per unit of x on average. It is how beta is estimated and the first model most quant researchers try.ExampleRegressing a stock's daily returns on the market's gives a slope of 1.3: on average the stock moves 1.3% for each 1% move in the market.See also Beta, Correlation, Overfitting
Mean reversion: The tendency of a price, spread, or ratio to drift back toward its average after moving away. Pairs trading and many statistical arbitrage strategies are bets on it.ExampleTwo similar bank stocks usually trade at a price ratio of 1.5. When it stretches to 1.7, a pairs trader shorts the expensive one and buys the cheap one, betting the ratio falls back toward 1.5.See also Statistical arbitrage, Factor
Sharpe ratio: Return above the risk-free rate divided by the volatility of returns. A strategy earning 10% with a 4% risk-free rate and 12% volatility has a Sharpe ratio of (10 - 4) / 12 = 0.5. Higher means more return per unit of risk.ExampleStrategy A returns 15% with 20% vol; B returns 9% with 6% vol. With a 3% risk-free rate, A's Sharpe is (15 - 3) / 20 = 0.6 and B's is (9 - 3) / 6 = 1.0, so B earns more per unit of risk.See also Alpha, Backtest
Slippage: The gap between the price a trade was expected to get and the price it actually got, from the spread, market impact, or prices moving before the fill. Backtests that ignore it overstate returns.ExampleA strategy expects to buy 10,000 shares at $50.00 and averages $50.06. Slippage is $0.06 a share, or $600 on the trade.See also Order book, Backtest, Bid-ask spread
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
Statistical arbitrage (stat arb): Trading many small, statistically predicted mispricings across hundreds of securities at once, usually with little net market exposure. Each trade is close to a coin flip; the edge only shows up across thousands of them.ExampleA book holds 500 longs and 500 shorts, each a small bet that is right 51% of the time. Any single trade is noise; across 100,000 trades a year the edge is steady and market moves mostly cancel.See also Mean reversion, Factor, High-frequency trading

Recruiting11

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
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
Off-cycle: Recruiting or internships outside the usual timeline, such as a fall or spring internship, or a fund hiring one associate whenever it needs one. Many smaller firms recruit only this way.ExampleA student takes a fall semester internship at a 15-person M&A boutique that hires whenever a deal needs help, then uses it to apply for a junior summer analyst role.See also On-cycle, Headhunter
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
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
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

Trading and products8

Bid-ask spread: The gap between the highest price a buyer will pay (the bid) and the lowest a seller will accept (the ask). A stock quoted 100.00 bid, 100.02 ask has a 2 cent spread, which is roughly what a market maker earns for providing liquidity.ExampleA bond quoted 99.50 bid, 99.75 ask: buying $10m face costs $9,975,000 and selling it straight back brings $9,950,000. Crossing the spread both ways cost $25,000.See also Market maker, High-frequency trading
Call option: The right, but not the obligation, to buy an asset at a set strike price. A call with a $50 strike on a stock trading at $60 at expiry is worth $10, minus whatever premium you paid for it.ExamplePay $3 for a call with a $50 strike. With the stock at $58 at expiry, it is worth $8 and you net $5; below $50 it expires worthless and you lose the $3. Breakeven is $53.See also Put option, Delta, Black-Scholes model
Delta: How much an option's price changes for a $1 move in the underlying. A call with a delta of 0.5 gains about 50 cents when the stock rises $1. Traders hedge by holding the opposite delta in the underlying.ExampleYou sell 100 call contracts, 10,000 shares' worth, with a delta of 0.40. To be flat you buy 4,000 shares; if delta rises to 0.55, you buy 1,500 more.See also Gamma, Hedging, Call option
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
Implied volatility (implied vol): The volatility the market is pricing into an option, backed out of the option's price with a model like Black-Scholes. Options traders think of themselves as buying and selling volatility, so they quote in vol rather than dollars.ExampleA call priced at $4.00 implies 30% vol. The next day, stock unchanged, it trades at $4.60, implying 35%. Traders say vol went up 5 points, not that the option rose 60 cents.See also Black-Scholes model, VIX, Gamma
Put option: The right, but not the obligation, to sell an asset at a set strike price. A put with a $50 strike on a stock trading at $40 at expiry is worth $10. Investors buy puts as insurance against a drop.ExampleOwn 1,000 shares at $80 and buy $75 puts for $2 a share. If the stock falls to $60, the puts pay $15 a share, capping your loss at $7 a share including the premium.See also Call option, Hedging
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
Event-driven investing (event-driven): A hedge fund strategy that trades around corporate events: mergers, spinoffs, bankruptcies, and restructurings. Merger arbitrage, buying the target after a deal is announced and earning the gap to the deal price, is the classic example.ExampleA target trades at $47 after an agreed $50 cash takeover. A merger arb fund buys at $47, earns $3, about 6.4%, if the deal closes, and risks a fall back to the pre-deal $35 if it breaks.See also Activist investing, Distressed debt, Hedge fund
Global macro: A hedge fund strategy that bets on big economic themes through rates, currencies, commodities, and equity indexes. A macro trader might buy Treasuries expecting the Fed to cut faster than the market is pricing.ExampleA macro PM expects the Fed to cut 100 bps next year while futures price only 50. She buys two-year Treasury futures; if the extra cuts arrive, two-year yields fall and the position pays.See also Hedge fund, Federal Open Market Committee, Treasury securities
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
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
Multi-manager platform (pod shop, multi-strategy fund): A hedge fund, such as Citadel, Millennium, or Balyasny, that gives capital to dozens of independent trading teams, called pods, under tight risk limits. A pod that loses past its set drawdown limit has its capital cut or is shut down.ExampleA pod gets $500m of capital with a 5% drawdown limit. Once it is down $25m, its capital is typically cut in half; at a 7.5% loss, $37.5m, the pod is often shut down.See also Hedge fund, Long/short equity

Valuation7

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
Comparable companies analysis (trading comps, comps): Valuing a company by how the market prices similar public companies, using multiples like EV/EBITDA or P/E. You pick peers by industry, size, and growth, take a range of their multiples, and apply it to the target's numbers.ExampleFive software peers trade at 12x to 16x EV/EBITDA. Applied to a target with $40m of EBITDA, that range implies an enterprise value of $480m to $640m.See also Precedent transactions, EV/EBITDA multiple, Price-to-earnings ratio, Football field
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

Credit and restructuring4

Absolute priority rule: In bankruptcy, each class of claims is paid in full before the next one gets anything: secured debt, then unsecured debt, then preferred stock, then common equity. Negotiated settlements often bend it in practice.ExampleA bankrupt company is worth $500m. Secured lenders owed $400m are paid in full, unsecured holders owed $300m split the remaining $100m, about 33 cents on the dollar, and shareholders get nothing.See also Chapter 11, Distressed debt, Debtor-in-possession financing
Chapter 11: The part of the US Bankruptcy Code that lets a company keep operating while it reorganizes its debts under court supervision. Creditors usually recover less than they are owed, and existing shareholders are often wiped out. Chapter 7 is liquidation.ExampleA retailer with $2bn of debt files Chapter 11 and keeps its stores open. It exits a year later with $800m of debt; the old bondholders own the new equity and the old shareholders get nothing.See also Debtor-in-possession financing, Absolute priority rule, Distressed debt
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
Distressed debt: Bonds or loans of companies in or near default, trading well below face value. Distressed investors buy them to profit from the recovery or to take control of the company through a restructuring.ExampleA bond trades at 40 cents on the dollar, and you think a restructuring recovers 60 cents. Buying $10m of face value for $4m and receiving $6m of value is a 50% gain.See also Chapter 11, Absolute priority rule, Yield to maturity

LBOs and private equity1

Carried interest (carry): The general partner's share of a fund's profits, typically 20%, paid after investors get their money back plus a hurdle return. It is where most senior PE wealth comes from.ExampleA $1bn fund returns $2bn. LPs get their $1bn back plus the hurdle, and with a full catch-up the GP ends up with 20% of the $1bn profit: $200m of carry.See also Hurdle rate, Management fee, General partner

Accounting15

Accounts receivable

Money customers owe the company for products or services already delivered and billed. It sits in current assets. When it rises, revenue was booked but the cash has not arrived yet, so operating cash flow falls by the increase.ExampleA company books $40m of December sales but collects only $30m by year end. Receivables rise $10m, so cash from operations comes in $10m below the profit those sales produced.See also Net working capital, Accrual accounting, Cash flow statement

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

Deferred revenue

Cash a customer paid before the company delivered, like an annual software subscription billed up front. It starts as a liability and becomes revenue month by month as the service is provided.ExampleA customer prepays $1,200 in January for a year of software. Deferred revenue starts at $1,200, and $100 moves to revenue each month, so $600 is left on the balance sheet after June.See also Accrual accounting, 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

Levered free cash flow (LFCF, free cash flow to equity, FCFE)

Cash left for shareholders after operating costs, taxes, interest, reinvestment, and required debt repayment. It drives an LBO's debt paydown and a dividend's safety. Unlevered free cash flow is the same idea before interest and debt payments.ExampleCash from operations of $50m (already after interest), $15m of capex, and $10m of required debt repayment leave $25m of levered free cash flow.See also Unlevered free cash flow, Cash flow statement, Leveraged buyout

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

Stock-based compensation (SBC)

Pay given to employees in shares or options instead of cash. It is an expense on the income statement but added back on the cash flow statement as non-cash. Many investors still treat it as a real cost because it dilutes shareholders.ExampleA software company grants $40m of stock to employees in a year. Operating income falls $40m, cash from operations adds the $40m back, and existing shareholders are diluted by the new shares.See also Cash flow statement, Treasury stock method

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

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

VIX

Cboe's index of expected 30-day volatility in the S&P 500, calculated from option prices. It tends to jump when stocks fall, which is why people call it the fear gauge.ExampleA VIX of 16 means options price the S&P 500 to move about 16% a year, or roughly 1% a day, since 16 divided by the square root of 252 trading days is about 1.See also Implied volatility, Risk-on and risk-off

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

Quant12

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

Arbitrage

Locking in a riskless profit from prices that are inconsistent with each other, by buying the cheap side and selling the rich one at the same time. True arbitrage is rare and quickly competed away; most trades called arbitrage carry some risk.ExampleA share trades at $40.00 on one exchange and $40.05 on another. Buying on the first and selling on the second locks in $0.05 a share before fees.See also Statistical arbitrage, Put-call parity, Market maker

Backtest

Running a trading strategy on historical data to see how it would have done. Useful, but easy to fool yourself with: trading costs, slippage, and data you would not have had at the time all have to be handled honestly.ExampleA strategy backtests at 12% a year before costs but turns over its whole book every day. At 3 bps of cost per turnover, 250 trading days cost 7.5% a year, and most of the edge is gone.See also Overfitting, Sharpe ratio

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

Expected value

The probability-weighted average outcome. A bet that pays $10 with probability 0.3 and nothing otherwise has an expected value of $3. Quant interviews test it constantly with dice, cards, and betting games.ExampleRoll one die and get paid the number in dollars: the expected value is (1 + 2 + 3 + 4 + 5 + 6) / 6 = $3.50. Pay $3 to play and you have a 50 cent edge per roll.See also Kelly criterion, Market-making game

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

Linear regression (regression)

Fitting a straight line y = a + b x to data by minimizing the sum of squared errors. The slope b says how much y moves per unit of x on average. It is how beta is estimated and the first model most quant researchers try.ExampleRegressing a stock's daily returns on the market's gives a slope of 1.3: on average the stock moves 1.3% for each 1% move in the market.See also Beta, Correlation, Overfitting

Mean reversion

The tendency of a price, spread, or ratio to drift back toward its average after moving away. Pairs trading and many statistical arbitrage strategies are bets on it.ExampleTwo similar bank stocks usually trade at a price ratio of 1.5. When it stretches to 1.7, a pairs trader shorts the expensive one and buys the cheap one, betting the ratio falls back toward 1.5.See also Statistical arbitrage, Factor

Sharpe ratio

Return above the risk-free rate divided by the volatility of returns. A strategy earning 10% with a 4% risk-free rate and 12% volatility has a Sharpe ratio of (10 - 4) / 12 = 0.5. Higher means more return per unit of risk.ExampleStrategy A returns 15% with 20% vol; B returns 9% with 6% vol. With a 3% risk-free rate, A's Sharpe is (15 - 3) / 20 = 0.6 and B's is (9 - 3) / 6 = 1.0, so B earns more per unit of risk.See also Alpha, Backtest

Slippage

The gap between the price a trade was expected to get and the price it actually got, from the spread, market impact, or prices moving before the fill. Backtests that ignore it overstate returns.ExampleA strategy expects to buy 10,000 shares at $50.00 and averages $50.06. Slippage is $0.06 a share, or $600 on the trade.See also Order book, Backtest, Bid-ask spread

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

Statistical arbitrage (stat arb)

Trading many small, statistically predicted mispricings across hundreds of securities at once, usually with little net market exposure. Each trade is close to a coin flip; the edge only shows up across thousands of them.ExampleA book holds 500 longs and 500 shorts, each a small bet that is right 51% of the time. Any single trade is noise; across 100,000 trades a year the edge is steady and market moves mostly cancel.See also Mean reversion, Factor, High-frequency trading

Recruiting11

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

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

Off-cycle

Recruiting or internships outside the usual timeline, such as a fall or spring internship, or a fund hiring one associate whenever it needs one. Many smaller firms recruit only this way.ExampleA student takes a fall semester internship at a 15-person M&A boutique that hires whenever a deal needs help, then uses it to apply for a junior summer analyst role.See also On-cycle, Headhunter

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

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

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

Trading and products8

Bid-ask spread

The gap between the highest price a buyer will pay (the bid) and the lowest a seller will accept (the ask). A stock quoted 100.00 bid, 100.02 ask has a 2 cent spread, which is roughly what a market maker earns for providing liquidity.ExampleA bond quoted 99.50 bid, 99.75 ask: buying $10m face costs $9,975,000 and selling it straight back brings $9,950,000. Crossing the spread both ways cost $25,000.See also Market maker, High-frequency trading

Call option

The right, but not the obligation, to buy an asset at a set strike price. A call with a $50 strike on a stock trading at $60 at expiry is worth $10, minus whatever premium you paid for it.ExamplePay $3 for a call with a $50 strike. With the stock at $58 at expiry, it is worth $8 and you net $5; below $50 it expires worthless and you lose the $3. Breakeven is $53.See also Put option, Delta, Black-Scholes model

Delta

How much an option's price changes for a $1 move in the underlying. A call with a delta of 0.5 gains about 50 cents when the stock rises $1. Traders hedge by holding the opposite delta in the underlying.ExampleYou sell 100 call contracts, 10,000 shares' worth, with a delta of 0.40. To be flat you buy 4,000 shares; if delta rises to 0.55, you buy 1,500 more.See also Gamma, Hedging, Call option

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

Implied volatility (implied vol)

The volatility the market is pricing into an option, backed out of the option's price with a model like Black-Scholes. Options traders think of themselves as buying and selling volatility, so they quote in vol rather than dollars.ExampleA call priced at $4.00 implies 30% vol. The next day, stock unchanged, it trades at $4.60, implying 35%. Traders say vol went up 5 points, not that the option rose 60 cents.See also Black-Scholes model, VIX, Gamma

Put option

The right, but not the obligation, to sell an asset at a set strike price. A put with a $50 strike on a stock trading at $40 at expiry is worth $10. Investors buy puts as insurance against a drop.ExampleOwn 1,000 shares at $80 and buy $75 puts for $2 a share. If the stock falls to $60, the puts pay $15 a share, capping your loss at $7 a share including the premium.See also Call option, Hedging

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

Event-driven investing (event-driven)

A hedge fund strategy that trades around corporate events: mergers, spinoffs, bankruptcies, and restructurings. Merger arbitrage, buying the target after a deal is announced and earning the gap to the deal price, is the classic example.ExampleA target trades at $47 after an agreed $50 cash takeover. A merger arb fund buys at $47, earns $3, about 6.4%, if the deal closes, and risks a fall back to the pre-deal $35 if it breaks.See also Activist investing, Distressed debt, Hedge fund

Global macro

A hedge fund strategy that bets on big economic themes through rates, currencies, commodities, and equity indexes. A macro trader might buy Treasuries expecting the Fed to cut faster than the market is pricing.ExampleA macro PM expects the Fed to cut 100 bps next year while futures price only 50. She buys two-year Treasury futures; if the extra cuts arrive, two-year yields fall and the position pays.See also Hedge fund, Federal Open Market Committee, Treasury securities

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

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

Multi-manager platform (pod shop, multi-strategy fund)

A hedge fund, such as Citadel, Millennium, or Balyasny, that gives capital to dozens of independent trading teams, called pods, under tight risk limits. A pod that loses past its set drawdown limit has its capital cut or is shut down.ExampleA pod gets $500m of capital with a 5% drawdown limit. Once it is down $25m, its capital is typically cut in half; at a 7.5% loss, $37.5m, the pod is often shut down.See also Hedge fund, Long/short equity

Valuation7

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

Comparable companies analysis (trading comps, comps)

Valuing a company by how the market prices similar public companies, using multiples like EV/EBITDA or P/E. You pick peers by industry, size, and growth, take a range of their multiples, and apply it to the target's numbers.ExampleFive software peers trade at 12x to 16x EV/EBITDA. Applied to a target with $40m of EBITDA, that range implies an enterprise value of $480m to $640m.See also Precedent transactions, EV/EBITDA multiple, Price-to-earnings ratio, Football field

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

Credit and restructuring4

Absolute priority rule

In bankruptcy, each class of claims is paid in full before the next one gets anything: secured debt, then unsecured debt, then preferred stock, then common equity. Negotiated settlements often bend it in practice.ExampleA bankrupt company is worth $500m. Secured lenders owed $400m are paid in full, unsecured holders owed $300m split the remaining $100m, about 33 cents on the dollar, and shareholders get nothing.See also Chapter 11, Distressed debt, Debtor-in-possession financing

Chapter 11

The part of the US Bankruptcy Code that lets a company keep operating while it reorganizes its debts under court supervision. Creditors usually recover less than they are owed, and existing shareholders are often wiped out. Chapter 7 is liquidation.ExampleA retailer with $2bn of debt files Chapter 11 and keeps its stores open. It exits a year later with $800m of debt; the old bondholders own the new equity and the old shareholders get nothing.See also Debtor-in-possession financing, Absolute priority rule, Distressed debt

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

Distressed debt

Bonds or loans of companies in or near default, trading well below face value. Distressed investors buy them to profit from the recovery or to take control of the company through a restructuring.ExampleA bond trades at 40 cents on the dollar, and you think a restructuring recovers 60 cents. Buying $10m of face value for $4m and receiving $6m of value is a 50% gain.See also Chapter 11, Absolute priority rule, Yield to maturity

LBOs and private equity1

Carried interest (carry)

The general partner's share of a fund's profits, typically 20%, paid after investors get their money back plus a hurdle return. It is where most senior PE wealth comes from.ExampleA $1bn fund returns $2bn. LPs get their $1bn back plus the hurdle, and with a full catch-up the GP ends up with 20% of the $1bn profit: $200m of carry.See also Hurdle rate, Management fee, General partner