Glossary

Common Terms Used in Offshore Hedge Funds and Global Investing

Accredited Investor –

refers an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. The requirements to become an accredited investor usually include a minimum wealth

Capital Structure Arbitrage –

seeks to capitalize on mis-pricing across different security classes within a company’s capital structure.

Convertible Arbitrage –

is the simultaneous purchase and sale of convertible securities and common shares of the same issuer, respectively.

Corporate Financing –

in hedge funds refers to exploiting short-term supply/demand imbalances, acquiring warrants inexpensively, and finding attractive entry-points ahead of catalysts and other value drivers.

Hedge Fund –

is a private investment partnership and pool of funds that uses varied and complex proprietary strategies and invests or trades in listed and unlisted derivatives, private offerings, distressed debt, options, warrants, and other investment vehicles.

Market-Neutral –

refers to the results of The Fund specifically NOT being tied to market, government, and social events. A Market-Neutral hedge fund will often be up by 2-3% during months when the S&P and other benchmarks are down 1-4%. There is no natural correlation between the benchmarks and drivers and the market-neutral funds.

Multi-Strategy –

refers to the strategy of a hedge fund that encompasses a variety of approaches possibly including some or all of the following: including arbitrage, long/short, pairs trading, spin-outs, special situations, distressed debt, and private offerings. In order to be good at a true multi-strategy approach, the fund manager needs to be disciplined and detail-oriented with good research to back their investments.

Merger Arbitrage-

is when hedge funds invest in companies that are being acquired, but whose shares are trading at a discount to the acquisition price. This involves assessing both the likelihood of the transaction closing and the timeline to its completion.

Offshore Hedge Fund –

refers to a fund that is domiciled in a location outside of one’s home country. The term is commonly used in the banking and financial sectors to describe areas where regulations and taxation are different from the home country. Offshore funds are incorporated in locations such as Bahamas or Cayman Islands, which offer tax efficiencies. Taxation, regulation, and investor demand are three main factors influencing the country a fund chooses to incorporate in. 

Prime Broker –

refers to the services provided by large financial institutions and discount brokers including securities lending, leveraged trade execution, and accessing research. Prime brokers typically require a minimum account size to transact with a particular hedge fund.

Relative Value Arbitrage –

is the simultaneous purchase and sale of highly correlated securities with discrepancies in value – also known as “pairs” trading.

Sharpe Ratio –

is a measurement used to calculate a fund’s risk-adjusted return using standard deviation. The higher a fund’s Sharpe ratio, the better a fund’s returns have been relative to the risk it has taken on. Many investors seek a safe investment vehicle to place their money. The Sharpe ratio helps identify those funds that keep the losses to a minimum while achieving returns.

Spinout –

is a type of corporate realignment often resulting from merger agreements involving the separation of a division to form a new independent corporation. These spinout assets are often attractively priced -elevated levels of both systematic risks and return expectations.