Book of Jargon® – Hedge Funds

An online glossary of hedge fund slang and terminology.

Welcome to the Book of Jargon® – Hedge Funds. This guide is intended to assist the newest members of the hedge fund community to learn how to talk the talk of hedge funds. It is intended to be a useful tool for recent law school and business school graduates seeking initiation into the industry and a desktop reference for not-so-recent graduates. In this book, you will find the keys to the secret verbal handshakes that make up the code of the hedge fund community.

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The information contained is not legal advice and should not be construed as such.

This Book of Jargon® is one of a series of practice area and industry-specific glossaries published by Latham & Watkins. The terms are also subject to change as applicable laws and customary practice evolve.

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  • A / B Exchange Offer:
    another name for an Exchange Offer.
    ABS:
    abbreviation for Asset-Backed Security.
    Accelerated Share Repurchase (ASR):
    a method used by an Issuer to buy back its own shares from the market via a dealer. Pursuant to a private agreement between Issuer and dealer, Issuer pays the Notional Amount of the repurchase price to dealer, receives an initial delivery of shares from the dealer and retires up to the notional number of shares received from dealer. Dealer “borrows” the shares delivered to Issuer from the securities lending market for the shares and later covers the borrowing with purchases of shares in the market. At maturity, the parties “true up” the difference between the repurchase price paid by the Issuer and the average share price at maturity. Also referred to as an Accelerated Share Buyback, or ASB.
    Acceleration:
    the end of the line under an Indenture or Credit Agreement. The definitions of Default and Event of Default describe how Acceleration occurs. Following an Event of Default, the Bondholders (under an Indenture) or Lenders (under a Credit Agreement) have the right to “accelerate” the due date of their debts; in other words, they have the right to declare their Notes or loans immediately due and payable. Bankruptcy and insolvency Events of Default automatically lead to Acceleration.
    Accredited Investor:
    defined under SEC Rule 501 of Regulation D, this refers to people and entities that are permitted to buy Securities in a Private Placement. The term covers virtually all the types of institutions that are participants in the Private Placement market, and also includes people who meet certain income or net worth thresholds.
    Accreted Value:
    the original purchase price of a Zero Coupon Bond or Discount Note plus all non-cash Interest that has accrued on the Bond or Note since the date of issuance. The calculation of Accreted Value is set forth in the Indenture under which the Bonds or Notes were issued.
    Adjusted EBITDA:
    refers to EBITDA, adjusted to eliminate the impact of certain unusual or non-cash items that the Issuer or Borrower (or its Sponsor) believes are not indicative of the future performance of its business. For reporting issuers, disclosure of EBITDA, Adjusted EBITDA and other “non-GAAP financial measures” must be done within the confines of Item 10 of Regulation S-K (in the case of certain public filings) and Regulation G of the SEC (in all cases). A form of Adjusted EBITDA is also a component of the Leverage Ratio and Fixed Charge Coverage Ratio definitions.
    ADR:
    abbreviation for American Depositary Receipt.
    ADS:
    abbreviation for American Depositary Share.
    ADTV:
    abbreviation for Average Daily Trading Volume.
    ADV:
    see Form ADV.
    Adviser:
    see Fund Manager.
    Advisers Act:
    another name for the Investment Advisers Act of 1940.
    Advisory Fee:
    the fee that is charged to a Fund for investment advisory services. See also Management Fee.
    Affiliate:
    defined slightly differently in different types of agreements, but generally refers to a subsidiary, corporation, partnership, or other person controlling, controlled by or under common control with another entity. The official Securities law definition is found in SEC Rule 144; however, the definition of “affiliate” is different under the Investment Company Act and the Investment Advisers Act.
    Affiliate Securities (Control Securities):
    Securities of an Issuer held by a person deemed an Affiliate of such Issuer under Rule 144 of the Securities Act. Such Securities are subject to the volume and manner of sale limitations of the rule.
    Affirmative Covenant:
    requires a Borrower or Issuer to affirmatively do something. These are contractual provisions in an Indenture or a Credit Agreement that itemize certain actions the Issuer or Borrower must take to be in compliance with the applicable document. Think of these as the “Thou Shalt” Covenants. Affirmative Covenants are usually more boilerplate in nature, covering such things as a promise by the Borrower to pay Interest and fees, maintain insurance, pay taxes, provide quarterly operating reports, and so forth. In a secured deal, the Affirmative Covenants regarding delivery and maintenance of Collateral will be more highly negotiated. Compare Negative Covenant.
    Agency Trade:
    a trade facilitated by a broker involving the transfer of Securities between customers. The broker involved receives a commission. Compare Principal Trade.
    Alfred Winslow Jones:
    the father of the Hedge Fund. A.W. Jones is credited for creating the basic Hedge Fund operating structure: (i) Leverage, (ii) Short positions as a Hedge against Long positions and (iii) the 20 percent Performance Fee. His “hedged fund,” A.W. Jones & Co., created in the late 1940s, was the most successful of its kind, and it spawned an entire industry. It is still around to today and now operates as a Fund of Funds.
    All or Substantially All:
    no one knows exactly what this phrase means. This phrase is used in various Covenants and other contractual provisions, but the precise meaning is the subject of much debate (and litigation). It does not necessarily mean what it sounds like in general layman’s terms. See, for example, Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir. 1982) and B.S.F. Co. v. Philadelphia National Bank, 204 A.2d 746 (Del. 1964).
    Alpha:
    the amount that an investment's Average Rate of Return exceeds the Risk Free Rate, adjusted for the inherent Systematic Risk. Measures the value that an investment manager produces, by comparing the manager's performance to that of a risk-free investment.
    Amendment:
    an Amendment or change to the provisions of an existing agreement. For instance, a Borrower might amend its Credit Agreement to allow for more indebtedness to be incurred.
    American Depositary Receipt (ADR):
    a Security that is held by a depository institution representing a specified number of underlying ordinary shares of a non-US company.
    American Depositary Share (ADS):
    United States dollar-denominated share of a non-US company available for purchase on a United States exchange. ADSs are issued by a depository institution in the United States under agreement with the issuing foreign company. Compare ADRs, which are not actually traded on an exchange.
    American Option:
    an Option exercisable at any time prior to and including the Expiration Date. Compare European and Bermuda Options.
    Amortization:
    the required periodic repayment in installments of portions of the principal of a loan prior to its final maturity. Bonds and Revolving Facilities generally do not Amortize. In accounting speak, Amortization is the same concept as Depreciation, except that intangible assets are Amortized and tangible assets are Depreciated. See Depreciation.
    Amortization Schedule:
    the schedule of regularly timed payments of principal prior to the maturity of a loan.
    Angel Investor:
    an investor that provides capital for a business start-up, usually in exchange for convertible Preferred Stock or equity ownership.
    Annual Rate of Return:
    the compounded gain or loss in a Hedge Fund's Net Asset Value during a calendar year.
    Annualized Rate of Return:
    Rate of Return on an investment lasting less than or more than one year, calculated as if it were a one-year return. For example, in the case of a one month investment, the Rate of Return for one month is multiplied by 12 to obtain an Annualized Rate of Return.
    Arbitrage:
    to take advantage of a price differential between two or more markets, such as by buying an investment in one market and then immediately selling it at a higher price in another market.
    Article 9:
    the law that governs the validity and Perfection of Security Interests in most personal property secured deals. This is the article of the UCC that governs secured transactions. See Perfection.
    ASR:
    abbreviation for Accelerated Share Repurchase.
    Asset Manager:
    see Fund Manager.
    Asset Swap:
    a Swap involving an exchange of the flow of payments from an asset for a different set of cash flows.
    Asset-Backed Security (ABS):
    a Security backed by a pool of assets selected by a banking institution or asset manager (e.g., Mortgages, credit card receivables, loans, etc.). The cash flows from these assets are used to repay the Security holders.
    Assets Under Management (AUM):
    the market value of all the assets managed by an Investment Adviser or Fund Manager.
    Assignment:
    a transfer of its rights and obligations under an agreement to a new party. The Advisers Act also has a specific definition for “assignment” which includes any direct or indirect transfer or Hypothecation of an investment advisory contract by the assignor or of a controlling block of the assignor's outstanding voting securities by a Security holder of the assignor.
    At Par:
    see Par Value.
    At-the-Money:
    an Option is At-the-Money when the price of the asset underlying the Option equals the Strike Price. Compare In-the-Money and Out-of-the-Money.
    Automatic Shelf Registration:
    a Registration Statement on Form S-3 or F-3 filed by a WKSI. The advantage of an Automatic Shelf Registration (as opposed to a plain-vanilla Shelf Registration filed by a company that is not a WKSI) is that it becomes automatically effective, so that sales of the Securities can take place immediately after filing, without the possibility of SEC review.
    Automatic Stay:
    the rule under Bankruptcy law that once a Bankruptcy case is commenced, creditors and other parties generally are not permitted to collect on claims against the debtor or otherwise obtain or exercise control or possession over property of the debtor’s bankruptcy estate outside of the Bankruptcy proceedings. Creditors may seek relief from the Automatic Stay by filing a motion with the Bankruptcy court. There are also a number of exceptions to the Automatic Stay, such as governmental entities exercising their police power and the termination or liquidation of certain financial contracts.
    Average Annual Return:
    see Annualized Rate of Return.
    Average Daily Trading Volume:
    average amount of individual Securities traded in a day.
    Average Monthly Return:
    cumulative gains and losses divided by the number of months of the investment's life, with compounding taken into account.
    Average Rate of Return:
    the sum of a Fund’s Rates of Return over a number of periods divided by the number of applicable periods.
 
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