June 14, 2006
Understanding hedge fund language
If you are an outsider trying to understand the hedge fund industry, the whole thing may seem very confusing and difficult. The language sounds alien and most of the time you are lost when hedge fund managers begin to speak. It isn't easy to keep track of what they are saying thanks to the professional jargon they use. So what's the best option available to you? You can either interrupt them every few minutes to ask them what a particular term means, or you can learn these terms so you can speak to them in their own language. Here’s a quick crash course for those who want to understand the market and the language of hedge funds. Since the subject is vast, we will go alphabetically:
- Abandon: To elect not to exercise or offset a long option position.
- Actuals: The physical or cash commodity, as distinguished from a futures contract.
- Agency Bond: A debt security issued by a government-sponsored enterprise such as Fannie Mae or Freddie Mac, designed to resemble a US Treasury bond.
- Aggregation: The principle under which all futures positions owned or controlled by one trader (or group of traders acting in concert) are combined to determine reporting status and compliance with speculative position limits.
- Arbitrage: A strategy involving the simultaneous purchase and sale of identical or equivalent commodity futures contracts or other instruments across two or more markets in order to benefit from a discrepancy in their price relationship. In a theoretical efficient market, there is a lack of opportunity for profitable arbitrage.
- Arbitration: A process for settling disputes between parties that is less structured than court proceedings. NFA ’s arbitration program provides a forum for resolving futures-related disputes between NFA members or between NFA members and customers. Other forums for customer complaints include the American Arbitration Association.
- Artificial Price: A futures price that has been affected by a manipulation and is thus higher or lower than it would have been if it reflected the forces of supply and demand.
- At-the-Market: An order to buy or sell a futures contract at whatever price is obtainable when the order reaches the trading facility.
- At-the-Money: When an option's strike price is the same as the current trading price of the underlying commodity, the option is at-the-money.
- Auction Rate Security: A debt security, typically issued by a municipality, in which the yield is reset on each payment date via a Dutch auction.
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