The return that an asset achieves over a certain period of time. This measure looks at the appreciation or depreciation (expressed as a percentage) that an asset – usually a stock or a mutual fund – achieves over a given period of time. In general, a mutual fund seeks to produce returns that are better that its peers, its fund category, and/or the market as a whole. This type of fund management is referred to as a relative return approach to fund investing. As an investment vehicle, an absolute return fund seeks to make positive returns by employing investment management techniques that differ from traditional mutual funds. Absolute return investment techniques include using short selling, futures, options, derivatives, arbitrage, leverage and unconventional assets.
The buying and selling of securities with the intention of holding the securities for a short duration, typically for no more than one day. Active trading as an investment strategy seeks to take advantage of short-term movements in price, and often focuses on financial instruments in higher demand, such as stocks, currencies, options, and derivatives. Active trading is considered one of the most speculative trading strategies.
An entity responsible for administrative tasks such as maintaining statutory books, attending to net asset value calculations and dealing with shareholder/unit holder services for a fund.
Arbitrage Trading Programme
A computer program used to place simultaneous orders for stock or commodities futures and the underlying stocks or commodities, usually for large volume, institutional trades. One order will be a long or short position on a futures contract, and the other order will be for the opposition position on the underlying. The ATP attempts to exploit price variations through a process called “”index arbitrage.””
An entity responsible for ascertaining the validity and reliability of accounting information in relation to the assets and value of a fund. An Auditor to a UCITS fund is an independent entity authorised by the relevant EU Member State of the UCITS fundâ€™s domicile to audit UCITS funds.
A major global provider of 24-hour financial news and information including real-time and historic price data, financials data, trading news and analyst coverage, as well as general news and sports. Its services, which span their own platform, television, radio and magazines, offer professionals analytic tools. One of its key revenue earners and what they are well known for is the Bloomberg Terminal – an integrated platform that streams together price data, financials, news, trading data, and much more to more than 250,000 customers worldwide.
Contracts For Difference are a form of FDI which is a contract between parties in which the value of underlying assets are determined by the contract and the overall value of the contract is determined by the future price
movement of the underlying asset.
Committee of European Securities Regulators partly reformed as ESMA. CESR was responsible for introducing key EU guidance notes notably guidance on Risk Measurement and Calculation of Global Exposure and Counterparty Risk for UCITS – CESR/10-788 guidance note.
Collective Investment Scheme
The term “”collective investment scheme”” is a legal concept deriving initially from a set of European Union Directives to regulate mutual fund investment and management. The Undertakings for Collective Investment in Transferable Securities Directives 85/611/EEC, as amended by 2001/107/EC and 2001/108/EC (typically known as UCITS for short) created an EU wide structure, so that funds fulfilling its basic regulations could be marketed in any member state. The basic aim of collective investment scheme regulation is that the financial “”products”” that are sold to the public are sufficiently transparent, with full disclosure about the nature of the terms.
In the United Kingdom, the primary statute is the Financial Services and Markets Act 2000, where Part XVII, sections 235 to 284 deal with the requirements for a collective investment scheme to operate. In states in section 235 that a â€œcollective investment schemeâ€ means “”any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.””
Collective Investments (UK Specific)
✔ Exchange-traded funds (ETFs) – Open-ended with a corporate structure.
✔ Investment Trusts – Introduced 1868. Closed-ended with corporate structure.
✔ Tax transparent funds – Introduced 2013.
✔ Open-ended investment companies (OEICs or ICVCs) – Introduced 1997. Open-ended with a corporate structure.
✔ Unit Trusts – Introduced 1931. Open-ended with a trust structure.
✔ Unitised Insurance Funds – Introduced 1970s. Open-ended with a life policy structure.
✔ With-profits policy – Open-ended with a life policy structure.
Collective Investments (Ireland Specific)
✔ Common contractual fund
Collective Investments (European)
A risk management approach used by UCITS funds in order to calculate the sum of the absolute leverage of the individual positions of the fund at the portfolio level.
Commodity Trading Advisors (CTA)
An entity registered with the Commodity Futures Trading Commission in the United States that receives compensation for managing and trading options and futures. Registration for CTAs is done through the National Futures Association in the United States, a self-regulated organisation responsible for reviewing and accepting registrations.
The risk UCITS funds must manage when applying their underlying investment strategies.
The documents of a UCITS fund which set out the rules by which the fund will operate. This will include the articles of association, partnership agreement terms, trust deed etc depending on the structure of the UCITS fund.
The risk UCITS funds may face should a counterparty not meet its contractual obligations.
A rule whereby a UCITS fund must always be able to cover 100% of its outstanding obligations.
The risk UCITS funds may face should one or more of their investment related counterparties fail to meet their own financial obligations.
The Committee on Uniform Security Identification Procedures. The CUSIP system has grown over the years to cover corporate, government, municipal, and international securities (through the CINS, or CUSIP International Numbering System); IPO’s; preferred stock; funds; certificates of deposit; syndicated loans; and US and Canadian listed equity options. The CGS database contains issuer and issue-level identifiers, plus standardized descriptive data, for more than 14 million financial instruments and entities.
A banking institution that holds the securities and other assets of funds and other institutional investors. A Custodian to a UCITS fund is an independent entity domiciled in the same jurisdiction as the UCITS fund and
authorised by the EU Member State regulator of the UCITS fund.
Key individuals appointed as directors to a fund entity who are ultimately responsible for the investors and will be held to account by the local regulator on the operations of the UCITS fund. They are required to be authorised
and approved by an EU Member State.
Usually a corporate entity in charge of distributing the units of a UCITS fund in an EU Member State.
As referred to in Appendix I, Eligible Assets are the prescribed investments authorised under the UCITS Directive in which a UCITS fund can invest subject to certain limits.
Undertakings for Collective Investments which are determined by EU Member State regulators to be an Eligible UCI for the purposes of an investment by a UCITS fund. EU Member States determine Eligible UCIs on the basis that such UCI is subject to an equivalent level of recognition and control to that of a UCITS fund.
An accounting method used to ensure the fair treatment amongst investors and managers regarding the payment of performance fees, whereby the profits and losses can be tracked by way of an additional income or expense
accounted to the investor.
Formerly CESR, the European Securities and Markets Authority is an independent EU authority that contributes to safeguarding the stability of the EUâ€™s financial industry. It offers guidance notes and sets EU standards of
A fund that tracks an index, but can be traded like a stock. ETFs are generally passively managed investments that seek to invest in the exact holdings of an index, and are usually never actively managed. ETFs are traded on stock exchanges and can be bought and sold at any time during the trading day (unlike most mutual funds). Their price will fluctuate from supply and demand, just like any other stockâ€™s price.
EU Member State
A Member State of the European Union being any one of the 27 sovereign states that make up the European Union (EU).
A passport which allows a UCITS fund to be marketed throughout the European Union.
Fonds Commun de Placement is a Luxembourgish form of a fund entity that is constituted as a contractual mutual fund.
FDI or Financial Derivate Instrument
A Financial Derivative Instrument (including swaps, futures contacts and options) which is an Eligible Asset under the UCITS Directive. It is a form of contract entered into between parties, the value of which is determined by an underlying asset to which it is linked and specifically the future price movement of that asset.
The highest value that has been reached by a fund throughout its historical track record. This value is used when determining the performance fee earned by the manager. Managers usually need to outperform their previous highest value before charging a performance fee.
The EU Member State in which the UCITS fund has been established.
The EU Member State which the UCITS fund wishes to distribute to.
The required rate of return above which a manager may charge a performance fee. Should a manager not meet its hurdle rate no performance fee would usually be charged.
Interest Rate and Currency Risks
The risk UCITS funds may face from currency and interest rates movements.
Investment Funds (France and Luxembourg)
✔ FCP (Fonds commun de placement) (unincorporated investment fund or common fund)
✔ SICAF (SociÃ©tÃ© d’investissement Ã capital fixe) (Investment company with fixed capital)
✔ SICAV (SociÃ©tÃ© d’investissement Ã capital variable) (Investment company with variable capital)
Investment Funds (Netherlands and Belgium)
✔ BEVAK (Investment company with fixed capital)
✔ BEVEK (Investment Company with variable capital)
✔ PRIVAK (Closed-end investment company)
The total length of time that an investor expects to hold a security or portfolio. The investment horizon is used to determine the investor’s income needs and desired risk exposure, which is then used to aid in security selection. As investment horizons increase in length, equities represent a higher risk-adjusted return than fixed-income securities and cash. Across shorter investment horizons, equities become the riskier asset class because they carry higher levels of volatility.
An International Securities Identification Number (ISIN) uniquely identifies a security. Its structure is defined in ISO 6166. Securities for which ISINs are issued include bonds, commercial paper, stocks and warrants. The ISIN code is a 12-character alpha-numerical code that does not contain information characterizing financial instruments but serves for uniform identification of a security at trading and settlement. Securities to which ISINs can be issued include debt securities, shares, options, derivatives and futures. The ISIN identifies the security, not the exchange (if any) on which it trades; it is not a ticker symbol. For instance, Daimler AG stock trades through almost 30 trading platforms and exchanges worldwide, and is priced in five different currencies; it has the same ISIN on each, though not the same ticker symbol. ISIN cannot specify a particular trading location in this case, and another identifier, typically MIC (Market Identification Code) or the three-letter exchange code, will have to be specified in addition to the ISIN. The Currency of the trade will also be required to uniquely identify the instrument using this method.
KIID or Key Investor Information Document
A document introduced by the UCITS IV Directive which will provide information in an easy to understand format. KIIDs have replaced the need to have a Simplified Prospectus.
The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. Leverage is most commonly used in real estate transactions through the use of mortgages to purchase a home. Leverage helps both the investor and the firm to invest or operate. However, it comes with greater risk. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would’ve been if the investment had not been leveraged – leverage magnifies both gains and losses. In the business world, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value.
The risk UCITS funds may face should they be unable to unwind their portfolioâ€™s positions at a suitable market price.
A corporate entity that is responsible for organising, managing, administering and generally attending to the daily operations of a fund. In respect of a Management Company to a UCITS fund, it is an entity authorised by an EU Member State regulator to provide management services to a UCITS fund. The Management Company need not be domiciled in the same jurisdiction as the UCITS fund it manages.
Management Company Passport
A passport which allows a management company the cross-border management of UCITS funds.
The risk UCITS funds may face from losses due to adverse movements in equity, bond, commodity, currency and other market prices.
The EU Markets in Financial Instruments Directive 2004/39/EC (as amended). Net Exposure takes into account the benefits of offsetting long and short positions in a portfolio and is calculated by subtracting the percentage of the fundâ€™s capital invested in short positions from the percentage of its capital used for long positions.
Common term used to describe UCITS funds that employ a sophisticated investment strategy.
Usually a corporate entity responsible for the payment of dividends in an EU Member State as declared by a UCITS fund.
Offering Memorandum [Private Placement Memorandum PPM]
A legal document stating the objectives, risks and terms of investment involved with a private placement. This includes items such as the financial statements, management biographies, detailed description of the business, etc. An offering memorandum serves to provide buyers with information on the offering and to protect the sellers from the liability associated with selling unregistered securities. Also known as a “”private placement memorandum”” (PPM).
A Promoter of a UCITS fund is an entity, with sufficient financial resources, authorised as a Promoter by the EU Member State of the UCITS fund.
A formal written document that describes the securities offered by a fund. In respect to a UCITS fund, a prospectus is a formal written document that is prepared in accordance with the UCITS Directive and approved by the EU Member State regulator. The prospectus will contain risk warnings and descriptions of the investment strategies, restrictions and policies in order to allow a potential investor to make an informed decision when making an investment in a UCITS fund.
Open-End Fund (or Open-Ended Fund)
A collective investment scheme which can issue and redeem shares at any time. An investor will generally purchase shares in the fund directly from the fund itself rather than from the existing shareholders. It contrasts with a closed-end fund, which typically issues all the shares it will issue at the outset, with such shares usually being tradable between investors thereafter.
✔ Open-ended funds are available in most developed countries, though terminology and operating rules vary. U.S. mutual funds, UK unit trusts and OEICs, European SICAVs, hedge funds and exchange-traded funds are all examples of open-ended funds.
✔ The price at which shares in an open-ended fund are issued or can be redeemed will vary in proportion to the net asset value of the fund, and therefore directly reflects the fund’s performance.
Risk Management Policy
Risk Management Policy is a key document scrutinised by the local EU Member State regulator as part of the approval process of a UCITS fund. It is meant to set out how the UCITS fund will ensure that risk in its investment strategy is controlled and how the Management Company shall manage the risks of its operations.
SEDOL stands for Stock Exchange Daily Official List, a list of security identifiers used in the United Kingdom and Ireland for clearing purposes. The numbers are assigned by the London Stock Exchange, on request by the security issuer. SEDOLs serve as the National Securities Identifying Number for all securities issued in the United Kingdom and are therefore part of the security’s ISIN as well. The SEDOL Masterfile (SMF) provides reference data on millions of global multi-asset securities each uniquely identified at the market level using a universal SEDOL code.
A separate account created by the Custodian in which the assets of a UCITS fund should be deposited. The assets in a Segregated Account are separate from the assets of the Custodian.
Individuals, usually with a local presence to the UCITS fund who supervise a number of delegated functions including investment management decisions, valuation policies and risk management controls. They can also be referred to as conducting persons.
Separate classes or series of shares which are created from time to time within a class of shares for new investors in a UCITS fund. Each Series within a class of shares is distinct, and the profits and losses of that Series can be tracked. The creation of Series of shares in a UCITS fund is a method by which each investor is
only liable to pay the fees attributable to their specific performance within the UCITS fund.
A SICAV is an open-ended collective investment scheme common in Western Europe, especially Luxembourg, Switzerland, Italy, Spain, Belgium, Malta, France and Czech Republic. SICAV is an acronym for French sociÃ©tÃ© d’investissement Ã capital variable, which can be translated as ‘investment company with variable capital’.
It is similar to an open-ended mutual fund in the United States, while a sociedad de inversiÃ³n de capital fijo or sociÃ©tÃ© d’investissement Ã capital fixe (SICAF) is similar to a closed-end fund. As in the case of other open-end collective investment schemes (such as contractual funds), the investor is in principle entitled at all times to request the redemption of his units and payment of the redemption amount in cash.
SICAVs are increasingly being cross-border marketed in the EU under the UCITS directive.
In finance, the Sharpe ratio (also known as the Sharpe index, the Sharpe measure, and the reward-to-variability ratio) is a way to examine the performance of an investment by adjusting for its risk. The ratio measures the excess return (or risk premium) per unit of deviation in an investment asset or a trading strategy, typically referred to as risk (and is a deviation risk measure), named after William Forsyth Sharpe.
A formal document that was a requirement under the UCITS III Directive and has now been replaced by the KIID. The Simplified Prospectus would summarise the full Prospectus and provide information on the UCITS fundâ€™s historical financial performance as well as detailing the relevant fees payable by investors in the UCITS fund. UCITS funds authorised under the UCITS III Directive must replace the Simplified Prospectus with the KIID by 1 July 2012.
The ratio is named for Dr. Frank A. Sortino, an early populariser of downside risk optimization. It measures the risk-adjusted return of an investment asset, portfolio or strategy. It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target, or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally. Though both ratios measure an investment’s risk-adjusted returns, they do so in significantly different ways that will frequently lead to differing conclusions as to the true nature of the investment’s return-generating efficiency.
The Sortino ratio is used as a way to compare the risk adjusted performance of programs with differing risk and return profiles. Any risk adjusted return is just trying to normalize the risk across programs, and then see which has the higher return unit per risk.
A set of objective rules designating the conditions that must be met for trade entries and exits to occur. A trading strategy includes specifications for trade entries, including trade filters and triggers, as well as rules for trade exits, money management, timeframes, order types, etc. A trading strategy, if based on quantifiable specifications, can be analyzed on historical data to project the future performance of the strategy. A trading strategy outlines the specifications for making trades, and includes rules for trade entries, exits and money management. When properly researched and executed, a trading strategy can provide a mathematical expectation for the specified rules, and help traders and investors determine if a trading idea is potentially profitable.
Shares in companies (or other securities equivalent to shares in companies), bonds or other forms of securitised debt or other negotiable securities which can be bought, sold or exchanged.
Undertaking for Collective Investments.
Undertaking for Collective Investments in Transferable Securities.
UCITS III Directive
Originally based on the UCITS I directive (Council Directive 85/611/EEC of 20 December 1985), which was amended and adjusted overtime and notably by two main directives, being the Management Directive (Directive
2001/107/EC of 21 January 2002) and the Product Directive (Directive 2001/108/EC of 21 January 2002).
UCITS IV Directive/UCITS Directive
The UCITS Directive 2009/65/EC. Value at Risk (VaR) VaR is a widely used risk measure of the risk of loss on a specific portfolio of assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) on the given probability level.
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