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leverage
The degree to which an investor or business uses borrowed money.  For investors, leverage means buying on margin or using derivatives such as options, to enhance return on value without increasing investment. Users of leverage seek to increase their overall invested amounts in hopes that the returns on their positions will exceed their borrowing costs. The extent of a fund's leverage is stated either as a debt-to-equity ratio or as a percentage of the fund's total assets that are funded by debt. Example: if a fund has $1 million of equity capital and it borrows another $2 million to bring its total assets to $3 million, its leverage can be stated as "two times equity" or as 67% ($2 million divided by $3 million). Ratios of between two and five to one are common.

limited partnership
Business entities managed by one or more general partners who are liable for the fund's debts and obligations. Investors in a limited partnership are limited partners who do not participate in day-to-day operations and are liable only to the extent of their investments. Many if not most hedge funds are set up as limited partnerships.

liquidity
The ease with which an investment product can be sold, in volume, without negatively impacting its price. Hedge funds typically offer quarterly or annual liquidity, meaning that they allow investors to redeem their shares that often.

liquidity risk
The potential that an investor will be unable to convert holdings to cash quickly and in large quantities without having to accept a substantial discount.

lockup
A period during which an investment cannot be redeemed or become subject to the standard liquidity provisions. The length of lockup period ranges from manager to manager. Hedge funds typically have a lockup of one year.

long-biased investment strategy
A strategy that holds many more long positions than short positions.

long-only investment strategy
A strategy that involves no short positions.

long/short investment strategy
A methodology in which fund managers buy stocks whose prices they expect will increase and short securities, typically in the same sector, whose prices they believe will decline.

 

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