Investment Term Glossary
Accreditation: The process by which an investor proves their income, net worth, and experience to invest in certain alternative investments such as private equity, venture capital, and real estate.
Accredited Investor: An investor that meets certain criteria under US securities law and is permitted to invest in certain types of private placements and investments.
Alternative Investments: Investment strategies that go beyond traditional stocks, bonds and cash. Examples include private equity, venture capital, hedge funds, real estate investment trusts (REITs), commodities and more.
Asset Allocation: The process of allocating investments across different asset classes in order to achieve a desired level of risk and return.
Beta: A measure of the volatility of an individual security relative to the overall market index it’s being measured on.
Capital Call: A request from a fund manager for the investor to provide additional capital for an investment that the fund has committed to.
Capital Gain: A profit made from selling an asset for more than it was purchased for.
Cash Flow: A measure of money flows into and out of a business or other entity that is used to measure its financial health over a given timeframe. Cash flow can be either positive or negative based on the amount of money coming in or going out.
Carry: Also known as “carry-income” or “promote income” this is typically a performance-based compensation paid to investors or fund managers when the returns on a given investment exceed predefined targets.
Closed End Fund (CEF): An investment fund that issues a limited number of shares that trade on an exchange, like any other publicly traded stock or bond.
Commitment: An agreement between an investor and a fund manager to commit capital towards an alternative investment opportunity over a specified timeframe. This usually takes the form of an installment plan where multiple payments are made at different intervals throughout the investing process.
Debt Financing: A form of financing where capital is borrowed to finance operations or acquisitions.
Diversification: The process of allocating investments across different asset classes, industries and geographies so as to reduce overall risk while still allowing for attractive returns over time.
Due Diligence: The careful investigation of potential investments prior to committing any money towards them. Due diligence includes researching the market opportunity, assessing management team capabilities and understanding all risks associated with the prospective investment.
Hurdle Rate: The rate of return that must be met before additional profits can be shared with investors in certain types of funds such as private equity funds or hedge funds. If it is not met, then no profits are shared until it is exceeded again.
Equity Financing: A form of financing used by companies or entrepreneurs to raise money through the sale or issuance of ownership interests in exchange for cash or other assets from investors.
Fund Performance Metrics: Measuring tools used by analysts to evaluate how well a fund is performing against its peers or benchmark indices such as Sharpe Ratio or Sortino Ratio.
Hedging Strategies: Techniques used by investors and managers to limit and reduce exposure to various forms of risks such as market risk, interest rate risk, currency risk, etc. By taking offsetting positions using derivatives market instruments such as futures contracts and options for example.
Implied Volatility: Used by traders and analysts measure the expected future price movements (volatility) implied by current option prices.
Inflation Risk: The uncertainty associated with future rates and values based upon changes in inflationary environment over time.
Internal Rate of Return (IRR): A metric used commonly among private equity funds which measures the projected rate at which a particular investment will generate return on invested capital once all expenses are taken into account.
J-Curve Effect: A phenomenon where some investments may take longer than expected before they turn profitable due to higher upfront costs compared to expected returns on those investments in earlier stages. This creates a downward sloping curve on a chart which represents these early losses before profits start rolling in later on during the life cycle of the investment.
Leverage: Using borrowed money or assets to increase the potential return of an investment.
Limited Partnership Agreement (LPA): An agreement between partners describing their respective rights and obligations within an alternative investment structure such as a limited partnership formed for private equity investing purposes.
Liquidity Risk: The risk that an investor may not be able to access their capital in a timely manner or realize its full value if needed quickly.
Mark-to-Market Accounting: An accounting process used by some types of asset-based businesses whereby assets are valued at their current market prices instead of their original purchase price when recording them on financial statements.
Mezzanine Financing: Debt with equity-like features provided usually at high cost, by specialized lenders who provide subordinated debt with higher yields than senior debt but lower than pure equity investments.
Net Asset Value (NAV): A metric used to represent the value per share held by investors in many types of alternative investments such as mutual funds, exchange traded funds (ETFs) and certain closed end funds (CEFs). NAV reflects how much each shareholder would receive if all assets were sold at current market values minus liabilities held by those entities .
Operational Leverage: Using operational efficiencies and scale achieved over time to increase profits and generate higher returns on invested capital than would have been possible otherwise.
Opportunity Cost: The cost associated with passing up on one opportunity to pursue another.
Peer Group Analysis: Comparing and contrasting performance metrics including returns, multiples, leverage ratios and distribution yields among similar alternative asset vehicles such as REITs, private funds, CEFs and ETFs for example.
Preferred Stock: These are hybrid type securities between common stocks and bonds with features that offer owners preference when it comes dividends and repayment in case of liquidation events.
Portfolio Diversification: Allocating investments across different asset classes and industries to reduce overall risk while still allowing for attractive returns over time.
Portfolio Manager: An individual who manages assets held within a portfolio using specialized expertise and objectives set forth by owners, investors and other stakeholders involved.
Private Equity Fund Manager: An individual who manages investments held by private equity firms using specialized expertise in evaluating deals and managing portfolio companies through ownership cycles from acquisition through divestiture or IPO stage exits.
Real Estate Investment Trust (REIT): A type of publicly traded security that holds portfolios of real estate properties with income generated from rental income, mortgages or other sources tied directly related to real estate ownership and management activities.
Risk Tolerance: The amount of volatility and losses an investor is willing to tolerate when investing to gain higher rewards over time.
Valuation Methodologies: Techniques used by investors and analysts to assess the value of an asset's worth based upon various factors including market comparables and discounted cash flow analysis techniques for example.