Glossary of terms

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 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.

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 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.

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.

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 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.

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 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.

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.

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.

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.

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.

The purchase of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value.

A pool of money invested together and managed by a fund manager.

An investment that pools investors' funds and invests in a variety of underlying mortgage securities.

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.

The sale of a security, such as a stock, commodity or currency with the expectation that the asset will fall in value.

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.

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.

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.

Volatility measures the dispersion of returns around their historical average. Assets that have higher volatility are generally perceived to be riskier in nature.