The absolute return index is used to compare the absolute returns posted by the hedge fund market, as a whole, against individual hedge funds.

Absolute Return Index Law and Legal Definition

The term absolute return index refers to a stock index designed to measure absolute returns on investments in hedge funds. Hedge funds are considered alternative investments that use pooled funds to earn returns for their investors.﻿﻿ The index was created to compare the performance of an individual hedge fund against the hedge fund market as a whole. With an. absolute return index, investors can easily discern the success or failings of a particular investment as it stacks up against the market as a whole and can do so without having to sift through the intricate details of each transaction.﻿﻿ The absolute return index is only useful when dealing with the hedge fund market. Hedge fund investors can use the hedge fund absolute return index to measure the returns of their investments. The term absolute return index refers to a stock index designed to measure absolute returns on investments in hedge funds.

Absolute Return Index

An activist investor is an individual or group that invests in a company and/or obtains seats on the board to effect a major change in the company. 

Carl Icahn Issues Open Letter to Tim Cook

Unaudited Condensed Interim Financial Statements June 30, 2020

Financial Statements Period Ended June 30, 2020

Letter to Mr. William F. Ruprecht, Chairman, President and Chief Executive Officer, Sotheby's

An activist investor is an individual or group that buys a significant stake in a public company in order to influence how the company is run, such as by obtaining seats on its board of directors. His targets have included RJR Nabisco, Texaco, Western Union, Viacom, Revlon, Time Warner, Yahoo!, Motorola, Apple and eBay, just to name a few.﻿﻿ In 2015, he pushed Apple CEO Tim Cook to use the company's cash pile to increase the size of its share buyback program.
In 1987, Icahn formed Dan Loeb is the founder of Third Point LLC, which is the investment manager for Third Point Offshore Master Fund, a London-listed closed-end fund with $8.6 billion in assets.﻿﻿ In 2012, Loeb took a position in Yahoo! and eventually gained a seat on its board of directors. In the past, Pershing has taken positions in Target Corporation and Wendy's International.﻿﻿ ﻿﻿ Ackman's more well-known moves include a disastrous short position in Herbalife, losing to Carl Icahn, who took the opposite side of the trade. In 2003, Ackman sold Icahn his stake in Hallwood Realty, and argued he was owed additional sums when Icahn later merged Hallwood with another real estate company.

Activist Investor

Attribution analysis is a quantitative method for analyzing a fund manager's performance based on investment style, stock selection, and market timing.

Attribution analysis is a sophisticated method for evaluating the performance of a portfolio or fund manager. Though some managers employ a buy-and-hold strategy, most are constantly trading, making buy and sell decisions throughout a given period. Segmenting returns by activity can be useful, telling you if a manager’s decisions to add or subtract positions from the portfolio helped or hurt the final return—vis-à-vis a more passive buy-and-hold approach.
Enter market timing, the third big factor that goes into attribution analysis. Attribution analysis focuses on three factors: the manager’s investment picks and asset allocation, their investment style, and the market timing of their decisions and trades. Attribution analysis focuses on three factors: the manager’s investment picks and asset allocation, their investment style, and the market timing of their decisions and trades. Also known as “return attribution” or “performance attribution,” it attempts to quantitatively analyze aspects of an active fund manager’s investment selections and decisions—and to identify sources of excess returns, especially as compared to an index or other benchmark.

Attribution Analysis

Dedicated short bias is a strategy where a hedge fund maintains an overall portfolio that benefits in a market decline.

Dedicated short bias is a hedge fund strategy that maintains a net short exposure to the market through a combination of short and long positions. Prior to the long-term bull market for U.S. equities that took place in the 1980s and 1990s, many hedge funds used a dedicated short strategy, rather than a dedicated short bias strategy. Dedicated short bias is a hedge fund strategy that maintains a net short exposure to the market through a combination of short and long positions. The dedicated short funds were virtually destroyed during the bull market, so the dedicated short bias fund emerged and took a more balanced approach. That said, these more flexible arrangements will have difficulty matching the performance of a dedicated short bias fund when the market is in a prolonged decline because there will be a lag time in adjusting positions that short fund won't have to deal with.

Dedicated Short Bias

A gate provision is a restriction placed on a hedge fund limiting the amount of withdrawals from the fund during a redemption period.

A gate provision refers to a statement in a fund's offering documents that establishes the fund manager’s right to limit or halt redemptions. Because a gate provision is invoked at the discretion of the fund manager, investors who find their money locked in understandably question the fund manager’s judgment. The gate provision is built into the fund offering to prevent a situation where redemption requests cost the fund further by forcing liquidation in an adverse market situation. A gate provision refers to a statement in a fund's offering documents that establishes the fund manager’s right to limit or halt redemptions. There have been cases, however, where a fund manager has used the gate provision to make certain that the capital is intact to carry out a critical phase of the strategy.

Gate Provision

A global macro hedge fund builds portfolios that seek to capitalize on the outcome of political or economic events or the market volatility that surrounds those events.

Global macro hedge funds are actively managed funds that attempt to profit from broad market swings caused by political or economic events. Global macro hedge funds that felt confident that Britain would vote to leave the EU took long positions in safe assets, such as gold, and chose short positions against European stocks and the British pound. Global macro hedge funds are actively managed funds that attempt to profit from broad market swings caused by political or economic events. Global macro hedge funds may position themselves around a particular outcome, or they can simply set up positions to profit from global market volatility when they do not have confidence in a prediction but know that a binary outcome is imminent. Global macro hedge funds that were uncertain about the outcome took long positions in safe havens and other instruments that payout during market volatility.

Global Macro Hedge Fund

A high-water mark is the highest level that a fund has reached in its history and plays a role in determining the manager's compensation.

A high-water mark is the highest peak in value that an investment fund or account has reached. For instance, at Goldman Sachs Asset Management, an investor who buys into the fund at a net asset value (NAV) below the high-water mark will enjoy the upside from the subscription NAV to the high-water mark without paying a fee. A high-water mark ensures that investors do not have to pay performance fees for poor performance, but, more importantly, guarantees that investors do not pay performance-based fees twice for the same amount of performance. With a high-water mark in place, all gains from $460,000 to $575,000 are disregarded, but gains above the high-water mark are subject to the performance-based fee. Without a high-water mark in place, the investor owes the original $15,000 fee, plus 20% on the gain from $460,000 to $690,000, which equates to 20% on a gain of $230,000, or an additional $46,000 in performance fees.

High-Water Mark

An institutional investor is a nonbank person or organization trading securities in quantities large enough to qualify for preferential treatment.

An institutional investor is a company or organization that invests money on behalf of other people. Since institutional investors can move markets, retail investors often research institutional investors’ regulatory filings with the Securities and Exchange Commission (SEC) to determine which securities the retail investors should buy personally. Broadly speaking, there are six types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds, and insurance companies. Retail investors typically buy and sell stocks in round lots of 100 shares or more; institutional investors are known to buy and sell in block trades of 10,000 shares or more. However, because of the nature of the securities and the manner in which transactions occur, some markets are primarily for institutional investors rather than retail investors.

Institutional Investor

LTCM was a large hedge fund that blew up in 1998, forcing the U.S. government to intervene to prevent financial markets from collapsing.

Long-Term Capital Management (LTCM) was a large hedge fund, led by Nobel Prize-winning economists and renowned Wall Street traders, that blew up in 1998, forcing the U.S. government to intervene to prevent financial markets from collapsing. If LTCM had gone into default, it would have triggered a global financial crisis due to the massive write-offs its creditors would have had to make.
When the losses approached $4 billion, the federal government of the United States feared that the imminent collapse of LTCM would precipitate a larger financial crisis and orchestrated a bailout to calm the markets. Long-Term Capital Management (LTCM) was a large hedge fund, led by Nobel Prize-winning economists and renowned Wall Street traders, that blew up in 1998, forcing the U.S. government to intervene to prevent financial markets from collapsing. LTCM’s highly leveraged trading strategies failed to pan out and, with losses mounting due to Russia's debt default, the U.S. government had to step in and arrange a bailout to stave off global financial contagion. Long-Term Capital Management (LTCM) was a large hedge fund led by Nobel Prize-winning economists and renowned Wall Street traders.

Long-Term Capital Management (LTCM)

Management fees are the price charged by a fund manager to invest capital on behalf of clients. The fee is meant to cover managers for their time and expertise.

A management fee is a charge levied by an investment manager for managing an investment fund. According to decades of Morningstar research, higher-cost actively managed funds do tend to underperform lower-cost passively managed funds in all categories.
Research by Nobel laureate William Sharpe has shown that “After costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar for any time period. Actively-managed funds generally result in higher management fees than those that are more passively-managed, however, actively-managed funds don't necessarily see better returns than those of passively-managed funds and in some cases, see worse returns. For example, an aggressive stock fund that turns over its portfolio several times a year in search of profit opportunities costs much more to manage than a more passively managed fund, such as an index fund that more or less sits on a basket of stocks without much trading. Management fee structures vary from fund to fund, but they are typically based on a percentage of assets under management (AUM).

Management Fee

Net exposure is the difference between a hedge fund's short positions and long positions, expressed as a percentage. 

Hedge Funds Slashed Market Exposure Throughout the Year

Hedge Fund Suvretta Slashed Exposure in October

Net exposure is the difference between a hedge fund’s long positions and its short positions. A fund has a net long exposure if the percentage amount invested in long positions exceeds the percentage amount invested in short positions, and has a net short position if short positions exceed long positions. Pros
Measures fund manager's expertise, performance
Indicates fund's vulnerability to volatility
Should be considered alongside gross exposure
May not reflect sector or other specific risks
Looking at how a fund's net exposure varies over the months or years and its impact on returns gives a good indication of the managers' commitment to and expertise on the short side and the fund's likely exposure to swings in the market. If 60% of a fund is long and 40% is short, for example, the fund's gross exposure is 100% (60% + 40%), and its net exposure is 20% (60% - 40%), assuming the fund uses no leverage (more on that below). As an example, consider:
30% long and 10% short equals 20% long
60% long and 40% short equals 20% long
80% long and 60% short equals 20% long

Net Exposure

A performance fee is a payment made to an investment manager for generating positive returns.

A performance fee is a payment made to an investment manager for generating positive returns. Critics of performance fees, including Warren Buffett, opine that the skewed structure of performance fees — where managers share in the funds' profits but not in their losses — only tempts fund managers to take greater risks to generate higher returns. The basic rationale for performance fees is that they align the interests of fund managers and their investors, and are an incentive for fund managers to generate positive returns. It is largely a feature of the hedge fund industry, where performance fees have made many hedge fund managers among the wealthiest people in the world. Performance fees charged by U.S. registered investment advisors fall under the Investment Advisers Act of 1940 and fees charged to pension funds governed by the Employee Retirement Income Security Act (ERISA) must satisfy special requirements.

Performance Fee

A quant fund is an investment fund that selects securities using advanced quantitative analysis.

Smart Beta, Quant Funds, and other Non-Traditional Index Funds

The Full Guide to Quant Funds: Careers, Salaries, Recruiting, Exits, and More

BlackRock Reorganizes Active Equity Unit, Turns More to Computer-based Quant Strategies

Quant Funds Have a Problem. So Why Do They Also Have So Many Assets?

A quant fund is an investment fund whose securities are chosen based on numerical data compiled through quantitative analysis. Investors are turning to and sticking with quantitative analysis within funds because of the rising availability of market data.
Although quant funds utilize state-of-the-art technology, the use of quantitative analysis isn't new.
Quant funds rely on algorithmic or systematically programmed investment strategies. _Security Analysis_ has been followed by further publications related to quantitative investment strategies, such as Joel Greenblatt’s _The Little Book that Beats the Market_ and James O'Shaughnessy’s _What Works on Wall Street_.
Quant funds are often classified as alternative investments since their management styles differ from more traditional fund managers. Quant funds can fail as they are largely based on historical events and the past doesn't always repeat itself in the future.
While a strong quant team will be constantly adding new aspects to the models to predict future events, it's impossible to predict the future every time. Proponents of quant funds believe that choosing investments using inputs and computer programs helps fund companies cut down on the risks and losses associated with management by human fund managers.

Quant Fund

A run on the fund is a situation where a hedge fund faces increasing redemptions, causing the fund managers to sell positions to meet the withdrawals.

Tudor's BVI Global Fund halts withdrawals

Peloton Lays Blame on Wall Street Lending Crackdown for Hedge Fund Liquidation

The Fed, Not the Reserve Primary Fund, 'Broke the Buck.'

Correcting the record: The Reserve Primary Fund and the financial crisis.

Division of Investment Management Responses to Frequently Asked Questions About the Reserve Fund and Money Market Funds

A run on the fund is a situation in which a hedge fund, or other asset pool, faces a growing number of requests for redemptions from investors. Though the fund kept just a fraction of its investments in Lehman debt, spooked investors withdrew nearly two-thirds of the fund’s total assets under management within days of the collapse.﻿﻿ Though the fund suspended redemptions, it was not enough to prevent its ultimate failure. This poor performance motivates investors to request the return of their money, which in turn causes the fund to exit its positions, leading to even worse performance and more redemptions, usually leading the hedge fund to ultimately shut down. But during the crisis, many large, famous hedge funds, like hedge fund pioneer Paul Tudor Jones’ BVI Global Fund, suspended redemptions to prevent a run on the fund. A run on the fund is when investors in a pooled investment such as a hedge fund suddenly and all at once request their money back via redemptions.

Run on the Fund

A short hedge is an investment strategy used to protect against the risk of a declining asset price in the future.

A short hedge is an investment strategy used to protect (hedge) against the risk of a declining asset price in the future. A producer can use a forward hedge to lock in the current market price of the commodity that they are producing, by selling a forward or futures contract today, in order to negate price fluctuations that may occur between today and when the product is harvested or sold. Commodity producers can similarly use a short hedge to lock in a known selling price today so that future price fluctuations will not matter for their operations. Let's assume it's October and Exxon Mobil Corporation agrees to sell one million barrels of oil to a customer in December with the sale price based on the market price of crude oil on the day of delivery. A short hedge involves shorting an asset or using a derivative contract that hedges against potential losses in an owned investment by selling at a specified price.

Short Hedge

A side pocket is a type of account used in hedge funds to separate illiquid assets from more liquid investments.

A side pocket is a type of account utilized in hedge funds to segregate riskier or illiquid assets from more liquid investments. Pros
Separates illiquid and liquid assets
Shields hedge fund returns from distressed assets
Simplifies accounting and administration
Limits fund redemption
Delay in redemption
Prone to misappropriation
Can be open to incorrect pricing
Not shared by new investors
In 2011, fund manager Lawrence Goldfarb and his private investment fund Baystar Capital II provided a leading case of side pocket-related malfeasance. Putting side pocket funds off-limits helps reduce too many early exits from the hedge fund, allowing fund managers to balance the need to meet investor redemptions with that of maintaining enough capital for the fund to appreciate. Holding illiquid assets in a standard hedge fund portfolio can cause a great deal of complexity when investors wish to take distributions or leave the fund altogether—another reason for placing these assets in a separate account. Resembling single-asset private equity funds in structure, side pocket accounts are exclusively used in the hedge fund industry by hedge fund managers.

Side Pocket

Window dressing occurs when a fund manager sells underperforming stocks and replaces them with attractive stocks for appearances' sake. 

Window dressing is a strategy used by mutual fund and other portfolio managers to improve the appearance of a fund’s performance before presenting it to clients or shareholders. To make it look like the fund was investing in stocks A and B all along, the portfolio manager sells out of stocks C and D, replacing them with, and giving an overweight to, stocks A and B.
The act of window dressing is under close watch by investment researchers and regulators with potentially forthcoming rules that could require more immediate and greater transparency of holdings at the end of a reporting period.
For investors, window dressing provides another good reason to monitor your fund performance reports closely. When performance has been lagging, mutual fund managers may use window dressing, selling stocks that have reported substantial losses and replacing them with stocks expected to produce short-term gains to improve the overall performance of the fund for the reporting period. For example, a precious metals fund might invest in stocks in a hot sector at the time, disguising the fund's holdings and investing outside the scope of the fund’s investment strategy. Some fund managers might try to improve returns through window dressing, which means investors should be cautious of holdings that seem out of line with the fund’s overall strategy.

Hedge Funds

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