Glossary of Alternative Investments
A comprehensive guide to 124+ terms across private equity, venture capital, hedge funds, and alternative investment management.
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144A Securities
144A Securities are privately placed securities in the U.S. sold to qualified institutional buyers (QIBs) under SEC Rule 144A, allowing for the resale of restricted securities without a public offering registration.
2 and 20 Fee Structure
The 2 and 20 fee structure is a compensation framework used in hedge funds and private equity, where managers charge a 2% management fee and a 20% performance fee, aligning their interests with investors by providing steady income and incentivizing strong performance.
3/5/10 Rule
The 3/5/10 Rule is a guideline used in alternative investments to manage risk and optimize returns through diversification by allocating funds across investments with varying levels of risk and return potential.
A
Absolute Return
Absolute return is a financial strategy focused on achieving positive returns regardless of market conditions by exploiting market inefficiencies and employing techniques like short selling, derivatives, and leveraging.
Accredited Investor
An accredited investor is an individual or entity permitted to invest in unregistered securities due to their financial knowledge and ability to absorb potential losses, typically meeting specific income or net worth criteria.
Activist Investing
Activist investing is a strategy where investors acquire significant stakes in public companies to influence management decisions and drive changes that enhance shareholder value.
Add-On Acquisition
An add-on acquisition is a strategic move where a company acquires another company to bolster its capabilities or expand its market presence.
Alpha Generation
Alpha generation refers to the process of generating excess returns on an investment relative to a benchmark index or the overall market.
Angel Investor
An angel investor is an individual who provides capital to startups or early-stage companies in exchange for equity or convertible debt.
Arbitrage
Arbitrage is the simultaneous purchase and sale of an asset in different markets to exploit a price difference for a risk-free profit.
Asset Stripping
Asset stripping is the practice of buying a company with the intention of selling off its assets for a profit.
Asset Under Management (AUM)
Asset Under Management (AUM) refers to the total market value of the investments that a financial institution or investment manager controls on behalf of clients.
B
Beta
Beta is a measure of a stock’s volatility in relation to the overall market, quantifying how much a stock’s price moves in comparison to a market index, like the S&P 500.
Bridging Loan
A bridging loan is a short-term financing option used to bridge the gap between the sale of one asset and the purchase of another, typically in real estate transactions.
Burn Rate
Burn Rate is the speed at which a company uses its cash reserves before generating positive cash flow.
Buyout
A buyout is a financial transaction where an investor or group acquires a controlling interest in a company, often aiming to restructure or revitalize it for improved performance and eventual profit.
C
Capital Call
A capital call is a request from an investment fund for its investors to provide part or all of the funds they have committed, typically used in private equity and venture capital to fund investments and cover expenses efficiently.
Capitalization Table (Cap Table)
A Capitalization Table, or Cap Table, is a document that outlines the equity ownership of a company, detailing who owns what percentage, including founders, investors, and other stakeholders, and is essential for understanding a company’s capital structure.
Carried Interest
Carried interest is a share of the profits that investment managers receive as compensation, typically from managing a private equity or hedge fund.
Club Deal
A club deal is a private equity transaction where a group of investors, usually institutional investors or private equity firms, collaboratively invests in a company, pooling resources to fund large-scale acquisitions.
Co-Investment
Co-investment is a strategy where multiple investors collaborate to jointly invest in a company or project, sharing both risks and rewards, which allows them to pool resources, leverage expertise, and access larger deals.
Committed Capital
Committed capital is the total amount of capital that investors pledge to a fund over its life, called upon as needed for investments, providing fund managers with the flexibility and security to execute long-term investment strategies.
Control Premium
A control premium is the additional price an acquirer is willing to pay over the current market price of a publicly traded company to obtain a controlling interest, allowing for strategic changes and potential value enhancement.
Convertible Arbitrage
Convertible arbitrage is an investment strategy that seeks to profit from the pricing inefficiencies between a company’s convertible securities and its underlying stock.
Convertible Note
A convertible note is a type of short-term debt that converts into equity, typically in conjunction with a future financing round, allowing startups to raise initial funding without immediately determining the company’s valuation.
D
Deal Flow
Deal flow refers to the rate at which investment opportunities are presented to investors or financial professionals.
Disruptive Technology
Disruptive technology is an innovation that significantly alters or replaces existing methods, products, or markets, often rendering them obsolete.
Distressed Investing
Distressed investing involves purchasing the securities of companies facing financial hardship or bankruptcy, aiming to profit from the eventual recovery or restructuring of the distressed company.
Down Round
A down round occurs when a company raises capital at a valuation lower than its previous funding round, often signaling diminished investor confidence or a challenging market environment.
Drag-Along Rights
Drag-Along Rights are provisions that enable majority shareholders to compel minority shareholders to join in the sale of a company, ensuring the transaction proceeds smoothly without being blocked by minority stakeholders.
Drawdown
Drawdown is the peak-to-trough decline during a specific period of an investment, trading account, or fund, representing the loss from a high to a low point, expressed as a percentage of the peak value.
Due Diligence
Due diligence is a comprehensive appraisal of a business or individual to establish assets and liabilities and evaluate potential risks and opportunities.
E
Early-Stage Financing
Early-stage financing is the initial capital provided to startups and young companies to help them develop their products and enter the market.
EBITDA
EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, is a financial metric used to assess a company’s operating performance by focusing on its profitability from core operations, excluding the effects of capital expenditures and financing costs.
Enterprise Value
Enterprise Value (EV) is a comprehensive measure of a company’s total value, incorporating market capitalization, debt, minority interest, and preferred shares, minus cash and cash equivalents, providing a holistic view of its financial worth, especially useful for assessing acquisition targets.
Event-Driven Strategy
An event-driven strategy is an investment approach that seeks to capitalize on stock price movements resulting from specific corporate events.
Exchange-Traded Fund (ETF)
An Exchange-Traded Fund (ETF) is a type of investment fund traded on stock exchanges that holds assets like stocks, commodities, or bonds and provides diversified exposure to various asset classes with the flexibility and cost-effectiveness of trading close to its net asset value.
Exit Strategy
An exit strategy is a planned approach to selling or liquidating an investment to realize gains or minimize losses.
Exit Valuation
Exit valuation is the estimated financial worth of an investment at the time of its sale or exit from a business venture, influenced by market conditions, company performance, and industry trends.
F
Follow-On Investment
A follow-on investment is additional funding provided to a company after the initial investment round to support continued growth or capitalize on new opportunities.
Fund of Hedge Funds
A Fund of Hedge Funds (FoHF) is an investment vehicle that pools capital to invest in a diverse portfolio of hedge funds, providing access to various hedge fund strategies, professional management, and risk mitigation for investors who might not meet the high minimum investment requirements of individual hedge funds.
Fundraising
Fundraising is the process of gathering financial contributions to support a project, venture, or organization.
G
General Partner (GP)
A General Partner (GP) is an entity or individual responsible for managing a private equity or venture capital fund, tasked with raising capital, selecting investments, managing the portfolio, and generating returns for investors known as Limited Partners (LPs).
Global Macro Strategy
Global Macro Strategy is an investment approach that analyzes economic and political trends on a global scale to make investment decisions.
H
Hedge Fund Manager
A hedge fund manager is a professional responsible for overseeing and making investment decisions for a hedge fund, aiming to achieve high returns for investors by utilizing strategies such as leveraging, short selling, and derivatives.
Hedge Funds
A hedge fund is a pooled investment vehicle that utilizes various strategies, including leverage and derivatives, to achieve active returns for its investors, typically accessible only to accredited individuals due to its higher risk and complexity.
High-Water Mark
A high-water mark is a benchmark used in fund management to ensure performance fees are only charged on new profits, protecting investors by preventing managers from collecting fees on gains that merely recover past losses.
Holding Period
The holding period is the duration an investment is held by an investor, from acquisition to sale.
Hurdle Rate
A hurdle rate is the minimum acceptable return on an investment, used by investors to determine whether a project is worth pursuing.
I
Incubator
An incubator is a program designed to help startups and early-stage companies develop by providing services such as mentorship, office space, and funding.
Initial Coin Offering (ICO)
An Initial Coin Offering (ICO) is a fundraising method used by startups to raise capital by issuing digital tokens in exchange for cryptocurrency or fiat money.
Initial Public Offering (IPO)
An Initial Public Offering (IPO) is the process by which a private company offers its shares to the public for the first time, allowing it to access capital from public investors for expansion and other corporate purposes.
Internal Rate of Return (IRR)
Internal Rate of Return (IRR) is a financial metric used to evaluate the profitability of an investment, representing the discount rate at which the net present value (NPV) of all cash flows from the investment equals zero, thus serving as a critical tool in capital budgeting for comparing potential profitability.
K
Key Person Provision
A Key Person Provision is a clause in investment agreements that ensures continuity in fund management by protecting investors if key individuals critical to the investment leave or are unable to perform their duties, halting further investment activities until a suitable replacement is found.
KYC (Know Your Customer)
KYC, or Know Your Customer, is a process used by financial institutions to verify the identity of their clients, ensuring transparency and trust while preventing fraud and illicit activities.
L
Later-Stage Financing
Later-stage financing is the process of funding a company that has already achieved significant growth and is seeking capital to expand further, optimize operations, or pursue new markets.
Leverage
Leverage is the strategic use of borrowed capital to increase the potential return on investment.
Leveraged Buyout (LBO)
A Leveraged Buyout (LBO) is a financial transaction where a company is acquired using a significant amount of borrowed money, typically bonds or loans, to meet the cost of acquisition.
Limited Partner (LP)
A Limited Partner (LP) is an investor in a partnership who provides capital but bears limited liability for the partnership’s debts and obligations, playing a crucial role in investment vehicles like private equity funds, venture capital funds, and hedge funds by contributing capital without participating in management.
Limited Partnership Agreement (LPA)
A Limited Partnership Agreement (LPA) is a legal contract that outlines the terms, conditions, rights, responsibilities, and liabilities of general and limited partners in a limited partnership, crucial for managing investment funds, particularly in private equity and venture capital.
Liquidation Preference
Liquidation preference determines the payout order in the event of a company’s liquidation or sale, specifying who gets paid first and how much they receive when a company is dissolved or acquired.
Lock-Up Period
A lock-up period is a predetermined span of time during which investors are restricted from selling or redeeming shares of a particular investment.
Long/Short Equity
Long/Short Equity is an investment strategy that involves buying stocks expected to increase in value and selling stocks expected to decrease in value, allowing investors to capitalize on market trends and hedge against downside risks.
M
Managed Futures
Managed futures are investment strategies that involve trading futures contracts and options across various asset classes, managed by professional advisors using systematic approaches to capitalize on market trends.
Management Buyout (MBO)
A Management Buyout (MBO) is a transaction where a company’s existing management team acquires a significant portion or all of the company from the current owners.
Market Neutral
Market Neutral refers to an investment strategy that aims to profit from both rising and falling prices in one or more markets, while minimizing exposure to overall market movements.
Master-Feeder Structure
A Master-Feeder Structure is an investment fund architecture that allows for pooling assets from multiple investors into a single investment vehicle, known as the "master fund.
Merger Arbitrage
Merger arbitrage is an investment strategy that seeks to capitalize on price discrepancies before and after a merger or acquisition is announced.
Mezzanine Financing
Mezzanine financing is a hybrid form of debt and equity financing that enables companies to raise capital during growth phases or acquisitions, positioned between senior debt and equity in the capital structure, offering higher interest rates and potential equity participation for investors.
Multi-Strategy Hedge Fund
A Multi-Strategy Hedge Fund is an investment fund that utilizes a variety of strategies, such as equity long/short, global macro, event-driven, and arbitrage, to achieve returns and diversify risk across different asset classes and markets.
Multiple on Invested Capital (MOIC)
Multiple on Invested Capital (MOIC) is a financial metric that measures the total value of an investment relative to its initial cost, providing investors with insight into the investment’s performance by indicating how many times the initial investment has been returned.
N
Net Asset Value (NAV)
Net Asset Value (NAV) is the per-share value of a mutual fund or exchange-traded fund (ETF), representing the fund’s total assets minus its liabilities.
Net Exposure
Net exposure is the measure of an investment’s total market exposure, calculated by subtracting the percentage of short positions from the percentage of long positions in a portfolio.
Net Performance
Net performance is the final financial outcome of an investment after accounting for all fees, expenses, and taxes, providing a clearer picture of what investors actually earn compared to gross performance.
Nominee/(Bare) trust
A nominee or bare trust is a legal arrangement where a trustee holds assets on behalf of a beneficiary without discretion, acting solely according to the beneficiary’s instructions, often used for asset protection, anonymity, and simplified management.
Notary
A notary is an official who serves as an impartial witness to the signing of important documents, ensuring their authenticity and legality.
O
Opportunistic Real Estate Strategy
An opportunistic real estate strategy focuses on high-risk, high-reward investments in properties that require significant improvement or development, offering the potential for substantial value creation through rehabilitation, redevelopment, or repositioning.
Option Pool
An option pool is a portion of a company’s shares set aside for future employee equity compensation, serving as an incentive tool to attract, retain, and motivate employees by granting them the right to purchase company shares at a predetermined price.
P
Pair Trading
Pair trading is a market-neutral trading strategy that involves matching a long position with a short position in two stocks with high correlation to capitalize on their relative performance.
Performance Fee
A performance fee is a payment made to an asset manager for generating positive returns on an investment portfolio, often structured as a percentage of the profits above a set benchmark, aligning the manager’s interests with those of the investor.
Pivot
A pivot is a strategic shift in business direction to test a new approach or optimize performance.
Portfolio Company
A portfolio company is a business in which a private equity firm or venture capital fund has invested, forming part of their "portfolio" of investments.
Post-Money Valuation
Post-money valuation is the value of a company after external financing or capital injections have been added to its balance sheet, crucial for determining ownership percentages and the dilution impact on existing stakeholders.
Pre-Money Valuation
Pre-Money Valuation is the estimated value of a company before it receives external investment or financing, crucial for determining the equity stake an investor receives.
Preferred Return
Preferred return is a predetermined rate of return given to investors before any profits are shared with general partners, ensuring a minimum return on their investment in private equity and real estate investments.
Preferred Stock
Preferred stock is a class of ownership in a corporation that offers a higher claim on assets and earnings than common stock, typically providing fixed dividends without voting rights, and prioritizing shareholders in dividend payments and asset liquidation.
Prime Brokerage
Prime brokerage is a suite of services offered by investment banks and financial institutions to hedge funds and other professional investors, including trade execution, clearing, custody, and financing, to enhance operational efficiency and market access.
Private Equity
Private equity is an investment class that involves acquiring equity ownership in private companies, often with the aim of restructuring and eventually selling these companies at a profit.
Private Investment in Public Equity (PIPE)
Private Investment in Public Equity (PIPE) refers to a private investment firm’s direct purchase of publicly traded company shares at a discount to the current market price.
Pro Rata Rights
Pro rata rights allow existing investors to maintain their ownership percentage in a company during future funding rounds by purchasing additional shares proportional to their current holdings when new equity is issued.
Q
Qualified Client
A qualified client is an investor who meets specific financial criteria set by the Securities and Exchange Commission (SEC) to invest in certain private investment vehicles, such as hedge funds.
Qualified Purchaser
A Qualified Purchaser is an individual or entity with substantial investments, typically $5 million for individuals or $25 million for entities, allowing them to access exclusive private placements not registered with the SEC.
Quartile
A quartile is a statistical term that divides a data set into four equal parts, each representing 25% of the data points, and is often used in finance to evaluate and compare investment performance.
R
Recapitalization
Recapitalization is a corporate restructuring strategy aimed at changing a company’s capital structure by altering the mix of equity and debt.
Redemption Notice Period
The Redemption Notice Period is the time frame investors must notify a fund manager before withdrawing their investment from a fund, allowing the manager to prepare and maintain fund stability.
Relative Value Strategy
A relative value strategy is an investment approach that seeks to exploit price discrepancies between related financial instruments.
Runway
Runway refers to the length of time a company can sustain its operations with its current cash reserves before needing additional funding.
S
SAFE (Simple Agreement for Future Equity)
A SAFE (Simple Agreement for Future Equity) is a financial instrument that allows startups to raise capital with the promise of issuing future equity, providing a straightforward and flexible alternative to traditional equity financing.
Secondary Buyout
A secondary buyout (SBO) is a transaction where one private equity firm sells a portfolio company to another private equity firm, often occurring when the selling firm seeks to realize its investment returns within a set timeframe, and the buying firm sees further growth potential.
Seed Capital
Seed capital is the initial funding used to start a business, covering early expenses before the company can generate revenue.
Seed Funding
Seed funding is the initial capital used to start a business, often from personal assets or angel investors.
Series A, B, C Funding
Series A, B, and C funding rounds represent stages of startup financing that enable companies to scale operations, develop products, and expand market reach.
Sharpe Ratio
The Sharpe Ratio is a financial metric used to evaluate the risk-adjusted return of an investment portfolio.
Side Pocket
A side pocket is an investment tool used by hedge funds to segregate illiquid or hard-to-value assets from the main portfolio.
Soft Lock-Up
A soft lock-up is a period during which investors in a fund are restricted from withdrawing their capital without incurring a penalty, allowing for some flexibility compared to a hard lock-up.
Startup
A startup is a young company founded to develop a unique product or service and bring it to market, characterized by innovation and scalability, aiming for rapid growth, often in fast-paced industries like technology.
Statistical Arbitrage
Statistical arbitrage is a trading strategy that uses quantitative models to exploit price inefficiencies across financial markets.
Structured Credit
Structured credit refers to financial instruments that pool and redistribute risk through complex securities, offering tailored risk-return profiles by bundling various types of debt into tranches with differing risk levels and returns.
Subscription Line of Credit
A Subscription Line of Credit is a short-term loan facility used by private equity funds, secured against investor commitments, to provide liquidity and enable swift investments without waiting for capital calls.
T
Target Company
A target company is a business entity identified as a potential acquisition or merger candidate, aligning with the strategic goals of the acquiring entity by offering value through assets, market position, or synergy potential.
Term Sheet
A term sheet is a non-binding agreement outlining the basic terms and conditions under which an investment will be made, serving as a blueprint for final deal agreements by detailing key aspects such as valuation, ownership, and investor rights.
Trade Sale
A trade sale is the process of selling a company, or a stake in it, to another company within the same industry.
V
Venture Capital
Venture Capital (VC) is a form of private equity financing provided by investors to startups and small businesses with high growth potential, characterized by risk and reward, often involving active roles in guiding strategic direction in exchange for equity.
Venture Debt
Venture debt is a type of financing provided to early-stage, high-growth companies that have already raised equity from venture capitalists, offering additional capital without diluting ownership and typically used to extend cash runway, invest in growth, or fund specific projects.
Vesting Schedule
A vesting schedule is a timeline that outlines when employees gain full ownership of certain benefits, typically retirement plans or stock options.
Volatility Arbitrage
Volatility arbitrage is an investment strategy that capitalizes on the difference between the forecasted future volatility of an asset and the implied volatility of options on that asset.
W
Waterfall Distribution
Waterfall Distribution is a financial framework in private equity and venture capital that outlines the method and order in which profits are distributed among partners, ensuring fair compensation based on specific benchmarks or hurdles.
Working Capital
Working capital is the difference between a company’s current assets and current liabilities, representing the liquidity available for day-to-day operations and serving as an indicator of short-term financial health and operational efficiency.
Z
Z-Score
A Z-Score is a statistical measurement that describes a value’s relationship to the mean of a group of values, expressed in terms of standard deviations from the mean, helping to determine how unusual or typical a data point is within the dataset.
Zero-Beta Portfolio
A zero-beta portfolio is an investment portfolio constructed to have a beta of zero, meaning its returns are not correlated with the market’s returns.
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