Chapter 2

  1. 40 Act funds
    Mutual funds, or '40 Act funds, are registered investment pools offering their shareholders pro rata claims on the fund's portfolio of assets.
  2. back office operations
    Back office operations play a supportive role in the maintenance of accounts and information systems used to transmit important market and trader information in all trading transactions, as well as in the clearance and settlement of the trades.
  3. bid-ask spread
    The price difference between the highest bid price (the best bid price) and the lowest offer (the best ask price) is the bid-ask spread.
  4. buy side
    Buy side refers to the institutions and entities that buy large quantities of securities for the portfolios they manage.
  5. closed-end mutual fund
    Closed-end mutual fund structures provide investors with relatively liquid access to the returns of unterlying assets even when the underlying assets are illiquid.
  6. commercial bank
    A commercial bank focuses on the business of accepting deposits and making loans, with modest investment-related services.
  7. custodians
    Depositories and custodians are very similar entities that are responsible for holding their clients' cash and securities and settling clients' trades, both of which maintain the integrity of clients' assets while ensuring that trades are settled quickly.
  8. dark pool
    A dark pool refers to non-exchange trading by large market participants that is hidden from the view of most market participants.
  9. depositories
    Depositories and custodians are very similar entities that are responsible for holding their clients' cash and securities and settling clients' trades, both of which maintain the integrity of clients' assets while ensuring that trades are settled quickly.
  10. Depository Trust Company (DTC)
    The Depository Trust Company(DTC) is the principal holding body of securitites for traders all over the world and is part of the Depository Trust and Clearing Corporation (DTCC), which provides clearing, settlement, and information services.
  11. endowment
    An endowmentis a fund bestowed on an individual or institution (e.g., a museum, university, hospital, or foundation) to be used by that entity for specific purposes and with principal preservation in mind.
  12. family office
    A family office is a group of investors joined by familial or other ties who manage their personal investments as a single entity, usually hiring professionals to manage money for members of the office.
  13. financial data providers
    Financial data providers supply funds primarily with raw financial market data, including security prices, trading information, and indices.
  14. financial platforms
    Financial platforms are systems that provide access to financial markets, portfolio management systems, accounting and reporting systems, and risk management systems.
  15. financial software
    Financial software may consist of prepackaged software programs and computer languages tailored to the needs of financial organizations. Some funds use open-source-software, and others pay licensing fees for proprietary software.
  16. foundation
    A foundation is a not-for-profit organization that donates funds and support to other organizations for its own charitable purposes.
  17. fourth markets
    Fourth markets are electronic exchanges that allow traders to quickly buy and sell exchange-listed stocks via the electronic communications systems offered by these markets.
  18. front office operations
    Front office opperations involve investment decision-making and, in the case of brokerage firms, contact with clients.
  19. fund administrator
    The fund administrator maintains a general ledger account, marks the fund's books, maintains its monthly profit and loss (P&L) statements, calculates its returns, verifies asset existence, independently calculates fees, and provides an unbiased, third-party resource for price confirmation on security positions.
  20. hedge fund replication
    Hedge fund replication is the attempt to mimic the returns of an illiquid or highly sophisticated hedge fund strategy using liquid assets and simplified trading rules.
  21. investment bank
    An investment bank focuses on providing sophisticated investment services, including underwriting and raising capital, as well as other activities such as brokerage services, mergers, and acquisitions.
  22. large dealer banks
    Large dealer banks are major financial institutions, such as Goldman Sachs, Deutsche Bank, and the Barclays Group, that deal in securities and derivatives.
  23. liquid alternatives
    Liquid alternatives are investment vehicles that offer alternative strategies in a form that provides investors with liquidity through opportunities to sell their positions in a market.
  24. management company operating agreement
    A management company operation agreement is an agreement between members related to a limited liability company and the conduct of its business as it pertains to the law.
  25. market making
    Market making is a practice whereby an investment bank or another market participant deals securities by regularly offering to buy securities and sell securities.
  26. market orders
    Market participants that wish to have transactions executed without delay may place market orders, which cause immediate execusion at the best available price.
  27. market takers
    Participants that place market orders are market takers, which buy at ask prices and sell at bid prices, generally paying the bid-ask spread for taking liquidity.
  28. Market in Financial Instruments Directive (MiFID)
    The Market in Financial Instruments Directive (MiFID) is an EU law that establishes uniform regulation for investment managers in the European Economic Area (the EU plus Iceland, Norway, and Liechtenstein).
  29. master limited partnerships (MLPs)
    Master limited partnerships (MLPs) are publicly traded investment pools that are structured as limited partnerships and that offer their owners pro rata claims.
  30. middle office operations
    Middle office operations form the interface between the front office and the back office, with a focus on risk management.
  31. mutual funds
    Mutual funds, or '40 Act funds, are registered investment pools offering their shareholders pro rata claims on the fund's portfolio of assets.
  32. partnership agreement
    A partnership agreement is a formal written contract creating a partnership.
  33. plan sponsor
    A plan sponsor is a designated party, such as a company or an employer, that establishes a health care or retirement plan (pension) that has special legal or taxation status, such as a 401(k) retirement plan in the United States for employees.
  34. primary market
    A primary market refers to the methods, institutions, and mechanism involved in the placement of new securities to investors.
  35. prime broker
    The prime broker has the following primary functions: clearing and financing trades for its clients, providing research, arranging financing, and producing portfolio accounting.
  36. private limited partnerships
    Private limited partnerships are a form of business organization that potentially offers the benefit of limited liability to the organization's limited partners (similar to that enjoyed by shareholders of corporations) but not its general partner.
  37. private-placement memoranda
    Private-placement memoranda (a.k.a. offering documents) are formal descriptions of an investment opportunity that comply with federal securities regulations.
  38. progressive taxation
    Progressive taxation places higher-percentage taxation on individuals and corporations with higher incomes.
  39. proprietary trading
    Proprietary trading occurs when a firm trades securities with its own money in order to make a profit.
  40. Regulation T margin rule
    Federal Reserve Board leverage rules include the Regulation T margin rule, which currently requires a deposit of at least 50% of the purchase cost or short sale proceeds of a trade (margin).
  41. secondary market
    A secondary market facilitates trading among investors of previously existing securities.
  42. Section 1256 contracts
    Section 1256 contracts include many futures and options contracts; have potentially enormous tax advantages in the United States, including having their income treated as 60% long-term capital gain and 40% short-term capital gain regardless of holding period.
  43. securitization
    Securitization involves bundling assets, especially unlisted assets, and issuing claims on the bundled assets.
  44. sell side
    Sell-side institutions, such as large dealer banks, act as agents for investors when they trade securities.
  45. separately managed accounts
    Separately managed accounts (SMAs) are individual investment accounts offered by a brokerage firm and managed by independent investment management firms.
  46. soft dollar arrangement
    A soft dollar arrangement generally refers to an agreement or an understanding by which an investment adviser receives research services from a broker-dealer in exchange for a fee (such as a commission) paid out of the fund or client account.
  47. sovereign wealth funds
    Sovereign wealth funds are state-owned investment funds held by that state's central bank for the purpose of future generations and/or to stabilize the state currency.
  48. subscription agreement
    A subscription agreement is an application submitted by an investor who desires to join a limited partnership.
  49. systemic risk
    Systemic risk is the potential for economic-wide losses attributable to failures or concerns over potential failures in financial markets, financial institutions, or major participants.
  50. third market
    Third markets are regional exchanges where stocks listed in primary secondary markets can also be traded. In the United States, third markets allow brokers and dealers to set up trades away from an exchange by listing their prices on the NASDAQ Intermarket.
  51. Undertakings for Collective Investment in Transferable Securities (UCITS)
    Regulation of hedge funds in Europe centers on the concept of Untertakings for Collective Investment in Transferable Securities (UCITS). UCITS are carefully regulated European fund vehicles that allow retail access and marketing of hedge-fund-like investment pools.
  52. universal banking
    Germany uses universal banking, which means that German banks can engage in both commercial and investment banking.
Card Set
Chapter 2
The Environment of Alternative Investments