Glossary
Absolute Return Fund
A fund that aims to offer a positive return irrespective of the general market direction. The target return is often set relative to a cash or inflation rate. Typically, long and short positions are taken in a number of instruments or markets in order to achieve this goal. Alpha: A measure of the difference between a portfolio’s actual returns and the returns of its benchmark. A positive alpha indicates the portfolio has performed better than its benchmark.
Active Management
An active fund manager tries to outperform stock market indices by selecting stocks, as opposed to the passive manager, who buys everything (or a representative portion) in any particular index in order to closely track its performance.
Derivatives
Derivatives are financial instruments that derive their value from that of an
underlying asset or index. There are two main types: futures, or contracts for
future delivery of an asset or commodity at a specified price, and options that
give one party the opportunity to buy from or sell to the other side an asset or
commodity at a prearranged price. Derivatives can be used to manage risk
(see hedging) or can themselves be traded speculatively.
Domicile
The country where someone, or something, is resident for tax purposes; it is difficult, though not impossible to change your domicile. Funds are also domiciled in a particular region. See 'Fund domicile'on the detailed fund pages on this web site.
Equity
Also known as shares. A share gives you part ownership of that company - in return you can attend Annual General Meetings where you can approve or disapprove the actions of the current management. Shares are high risk investments as nothing is guaranteed - if the company you have invested in goes broke you probably will get little, or any; of your capital back. However, because they are risky, shares tend to produce better returns than other forms of investment over the longer term and unlike bonds offer some protection against inflation.
Future
An agreement to buy or sell a set amount of a commodity or security in a designated future month at a price agreed upon today by the buyer and seller. There may be no intention to execute the contract but to rely upon price changes in order to sell at a profit before delivery. A future is part of a class of instruments called derivatives, so named because they derive their value from the value of an underlying investment.
Hard commodity
A hard commodity is a commodity such as metals, crude oil, or coal. This term generally refers to commodities that are mined, rather than grown.
Hedging
The use of financial transactions or instruments such as derivatives to offset a
risk or liability to the fund. For example, if the fund operator wishes to guard
against the impact of sudden price changes in a particular market, he can use
derivatives to counteract that risk.
Leverage
The use of borrowing to fund the purchase of assets to be held in an
investment fund. Borrowing exposes a fund to a liability, in that the debt must
ultimately be repaid from the fund. Also the use of derivatives for investment
purposes.
OEIC
Open Ended Investment Company. A collective investment scheme structured as a limited company in which investors can buy and sell shares on an ongoing basis. Compare with unit trust.
Click here for definition from the FSA
Short-selling
The practice of selling a quantity of an investment or asset (e.g. a share, bond
or derivative) without actually owning it. This may be done by either
borrowing the asset or buying it before the sale is settled. The practice allows
the seller to take advantage of anticipated changes in the market price
between the agreement to sell and completion of the deal.
Soft Commodity
A soft commodity is a commodity such as coffee, cocoa, sugar, corn, wheat, soybean and fruit. This term generally refers to commodities that are grown, rather than mined. Soft commodities play a major part in the futures market.
Swaps
Traditionally, the exchange of one set of cash flows for another to change the type of payment (such as fixed for floating rates), or quality of issues. Recently, swaps have grown to include swaps which allow portfolios to turn fixed rate bond payments into inflation-linked payments.
UCIT
Undertaking for Collective Investments in Transferable Securities (UCITS) European Union term for a mutual fund that can be marketed in all EU countries subsject to certain criteria.
Unit Trust
A pooled fund established under trust in which investors can buy and sell units on an ongoing basis. Known as mutual funds in the US and some other countries. Compare with OEIC.
Volatility
The extent to which a market or value of an individual asset may rise or fall
sharply within a period of time.
