Glossary

• Single Alpha

  Funds managed by hedge fund groups with an absolute return mandate but which don't add alpha on the short side. Their net exposure is never negative and they only short indices.

• Beta

  Often described as a standardized measure of systematic risk based upon an asset's covariance with the market portfolio, beta is also the slope of the regression line. Beta measures the risk of a particular investment relative to the market as a whole (the “market” can be any index or investment you specify). It describes the sensitivity of the investment to broad market movements. For example, in equities, the stock market (the independent variable) is assigned a beta of 1.0. An investment which has a beta of .5 will tend to participate in broad market moves, but only half as much as the market overall.

• Alpha

  The standard definition is "the return on an asset in excess of the asset's required rate of return." When evaluating fund managers, alpha is the "unexplained" return typically assigned to skill (especially by the managers themselves). But, really, it's the modeling error in the capital asset pricing model (more formally, the Y intercept of the regression line). And it can definitely be negative.

• Standard Deviation

  Standard deviation measures the dispersal or uncertainty of a variable (in this case, investment returns). It measures the degree of variation of returns around the mean (average) return. The higher the volatility of the investment returns, the higher the standard deviation will be. For this reason, standard deviation is often used as a measure of investment risk. However, standard deviation assumes a normal distribution (otherwise known as a bell curve). Typically, observed returns in absolute return strategies do not conform to such a "standard" pattern of outcomes.

• Correlation

  A number between -1 and +1 that measures the degree of co-movement between two variables. If, for example, a fund is .8 correlated to an equity index, it generally performs in a similar direction to the index. If a fund is -.8 correlated to an equity index, it tends to move counter to the index.

• Sharpe Ratio

  A return/risk measure developed by William Sharpe. Return (numerator) is defined as the incremental average return of an investment over the risk free rate. Risk (denominator) is defined as the standard deviation of the investment returns. Again, note that we're dealing in normal distributions here, which may not apply to hedge funds.