- Q -
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.
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.
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.
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.
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.
A strategy that holds
many more long positions than short positions.
A strategy that involves no short positions.
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.