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- Financial Services Guide
Glossary of terms
Alternative investments is an umbrella term that generally refers to investments other than stocks, property, bonds and cash. Hedge funds, managed futures, insurance-linked securities and private equity are all forms of alternative investments.
For more information read New to alternative investments?
Arbitrage involves the simultaneous purchase and sale of related securities that are perceived to be mispriced compared to each other in order to profit from a difference in price. Arbitrage exists as a result of market inefficiencies.
A bear market is associated with a general decline in the stock market in which the prices of stocks are falling, or are anticipated to fall in the future.
A debt security under which the issuer promises to repay to the bondholder an amount at a later date, and depending on the terms of the bond, also pay interest.
Bond issuers are typically companies and governments.
A bull market is associated with increasing investor confidence and increased as the price of stocks are rising, or are anticipated to rise in the future.
An investment strategy that aims to capture the difference in prevailing interest rates between two countries.
A basic strategy involves borrowing funds in a low interest rate currency and investing the proceeds in a higher yielding currency. For example, borrowing Japanese Yen (funding currency) and investing the proceeds in the Australian dollar (target currency).
The returns on a carry trade will in part be dependent on exchange rate movements between the funding currency and the target currency.
An individual or firm, that receives a fee for giving advice on trading futures and options and the actual trading of an account.
An investment strategy that attempts to profit from the perceived mispricing between convertible bonds and the underlying stock, due to the mispricing of the implied option in the convertible bond.
A basic strategy involves purchasing convertible bonds and shorting the underlying stock to hedge the associated equity risk.
Securities that behave like a normal bond but also have an additional feature of being convertible into a specified number of shares of the issuing company's stock.
A measure of how two securities move in relation to each other.
Positive correlation implies that as one security moves, either up or down, the other security will move in the same direction.
Negative correlation implies that as one security moves, either up or down, the other security will move in the opposite direction.
Zero or low correlation implies that the two securities will move in directions irrespective of each other.
Investments with zero or low correlation may provide diversification benefits.
A contract between two or more parties, the price of which is dependent upon one or more underlying assets. Common underlying assets include commodities, stocks and bonds.
Primarily debt securities that are issued by companies undergoing liquidation, reorganisation or some other form of distress.
Causes of distress include poor operating performance, high leverage and competitive pressures.
An investment strategy investing in distressed debt. For example, managers may purchase distressed debt where they consider that the issuing company's fortunes will turn around or where the distressed debt is trading at an excessive discount.
An emerging market generally refers to the financial market of a developing country. It is usually a market that is in the process of rapid growth and industrialisation. Current examples include India, China, Brazil and Russia.
An investment strategy that focuses on buying undervalued stocks and selling overvalued stocks.
Managers tend to look for investments in the equity market, taking long positions in solid companies that are trading at a discount and taking short positions in companies that are perceived to be overpriced.
Euribor, or the Euro Interbank Offered Rate, refers to the interest rate that banks charge each other for loans in the euro money market. The Euribor is used as a reference rate for euro-denominated rates, in much the same way LIBOR is commonly used for Sterling and US dollar denominated instruments.
A futures contract that is based on a debt instrument issued by the government of Germany. The bund, like the Treasury bond in the US, is a government backed instrument, issued to the public to finance spending.
A US dollar denominated deposit held in a bank outside of the United States. A Eurodollar deposit is not specific to European banks, for example a US dollar denominated deposit in Australia would also be referred to as a Eurodollar deposit.
Similar to Short Sterling contracts, Eurodollar futures contracts are a method by which one can make trades on the direction of US rates.
Eurozone, also know as the euro area, is a geographic and economic region consisting of 16 European member states which have adopted the euro currency as their legal tender.
An investment strategy that can capitalise on opportunities created by corporate events that affect the value of a company's securities.
Events may include mergers or acquisitions, spin offs, bankruptcy and reorganisations.
A contractual agreement between two parties to buy or sell a specified asset at a future date at a price agreed today.
The party buying the futures contract is taking a long position in the underlying asset and the party selling the futures contract is taking a short position.
Futures contracts are traded on liquid and regulated investment exchanges around the world.
An investment strategy that attempts to generate returns from price movements in equity, currency, commodity and interest rate markets.
A broad array of strategies are used to identify situations where a market is in disequilibrium and potential profits can be made. Trades can be based on fundamental, political, economic and market factors.
Global macro is generally considered the most flexible of all hedge fund styles.
A hedge fund is a professionally managed pool of capital investing across a broad universe of assets. Managers are able to invest in a wide variety of instruments using flexible investment strategies with the goal of generating returns in a variety of market conditions.
For more information, read What are hedge funds?
Generally refers to a bond or debt instrument that is rated at below investment grade because of its high default risk. For example a non-investment or speculative grade bond.
Refers to a company with a relatively large market capitalisation. The definition of large cap can vary, but generally it is a company with a market capitalisation value of more than $10billion.
Leverage, also known as gearing, refers to the use of borrowed funds or other arrangements to supplement an investment. Leverage can magnify the potential gain, or loss, of an investment.
LIBOR, or the London Interbank Offer Rate, refers to the interest rate that banks charge each other for loans. LIBOR is fixed once a day by a small group of London banks and is then published and used as a reference benchmark for bank rates all over the world.
The purchase of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value.
A managed account refers to a specific type of investment structure. Assets are held in the name of an investor and the manager operates the account according to a specific mandate.
As the assets are held in a separate account, managed accounts can reduce operational risk and increase transparency and liquidity.
Managed accounts are a different type of investment structure to managed funds.
A pool of money invested together and managed by a fund manager.
A managed futures fund is a professionally managed fund that primarily trades futures contracts, typically across many markets and sectors.
Managed futures funds aim to generate positive returns in both rising and falling markets, and are able to do this because they can both buy and sell instruments, and therefore do not have to rely solely on markets increasing in value.
For more information, read What are managed futures?
An investment that pools investors' funds and invests in a variety of underlying mortgage securities.
A stock market index consisting of a wide selection of stocks traded in 23 developed market countries in North America, Europe and the Asia/Pacific Region. The index is calculated with gross stock dividends reinvested and is considered an important benchmark of the state of global stock markets.
Government monetary policies designed to stimulate economic activity through increased lending and liquidity. The most frequently used policy is that of 'open market operations' which involves the buying of government securities in the open market in order to increase the amount of money in the banking system. QE is commonly used when interest rates have already been lowered to near 0% levels and have not produced the desired effect.
An investment strategy that aims to profit from perceived pricing discrepancies between similar or related securities.
The assumption is that the value of the two or more securities will converge over time, allowing managers to take long and short positions accordingly.
The sale of a security, such as a stock, commodity or currency with the expectation that the asset will fall in value.
The Short Sterling contract is an interest rate future that is highly correlated to UK base interest rates. The value of the contract reflects not only the underlying current interest rate but also the market view of what is going to happen to rates in the future. As events and economic numbers are released, the contracts will move in value.
Trades on UK interest rates can be made through Short Sterling futures contracts. For example if UK rates are expected to fall in the future then the value of the Short Sterling contract will rise.
Refers to a company with a relatively small market capitalisation. The definition of small cap can vary, but generally it is a company with a market capitalisation of between $300 million and $2 billion.
Debt, generally in the form of a bond, which has been issued by a national government.
A state owned pool of money that has been set aside for investment purposes. SWFs typically invest in a variety of financial assets such as property, bonds, stock, precious metals and other financial instruments. The funding for a SWF can come from central bank reserves that accumulate as a result of budget and trade surpluses.
Traditional assets generally refers to stocks, property, bonds and cash.
A debt instrument issued by the United States Department of Treasury that usually makes a coupon payment every six months and generally has a maturity of more than ten years. Once issued, Treasury bonds can be traded in the secondary market.
Generally refers to differing forms of government debt issued by the United States Department of Treasury. There are four main types of US treasuries: Treasury bonds, Treasury notes, Treasury bills and Treasury Inflation Protected Securities.
Volatility measures the dispersion of returns around their historical average. Assets that have higher volatility are generally perceived to be riskier in nature.
The term used for directionless, volatile markets that lack a clear and sustained trend. Whipsawing markets can be detrimental to the performance of trend following investment strategies that tend to profit from trends in the marketplace.
The income return on a security. Yield commonly refers to interest or dividends received from a security.