Financial Glossary


Absolute Return Strategies: An investment strategy with the objective of securing a stipulated level of return independently of a proscribed traditional stock or bond market index. The strategy targets an absolute return range, and not returns relative to a predetermined index. This is a common characteristic of hedge funds.

Accredited Investor: Defined by Rule 501 of Regulation D, an individual (i.e. non-corporate) "accredited investor" is a either a natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase OR a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. For the complete definition of accredited investor, see the SEC website.

Accrued Interest: The interest due on preferred stock or a bond since the last interest payment was made.

Acquisition: The process of gaining control, possession or ownership of a private portfolio company by an operating company or conglomerate.

ACRS: Accelerated Cost Recovery System. The IRS approved method of calculating depreciation expense for tax purposes. Also known as Accelerated Depreciation.

ADR: American Depositary Receipt (ADR's). A security issued by a U.S. bank in place of the foreign shares held in trust by that bank, thereby facilitating the trading of foreign shares in U.S. markets.

ADV: The Investment Advisor Act of 1940 requires all Registered Investment Advisors to complete Form ADV and file with the SEC. The SEC collects the information for regulatory purposes, such as deciding whether to grant registration. Form ADV information about investment advisors and their business is available to the public through the SEC.

Advisory Board: A group of external advisors to a private equity group or portfolio company. Advice provided varies from overall strategy to portfolio valuation. Less formal than a Board of Directors.

Allocation: The amount of securities assigned to an investor, broker, or underwriter in an offering. An allocation can be equal to or less than the amount indicated by the investor during the subscription process depending on market demand for the securities.

Alpha - A numerical value indicating excess rate of return relative to a benchmark. As it applies to hedge funds, it is a manager's "value-added" in selecting securities.

Alpha Confidence Interval (95%): The range within which the true alpha of the manager is estimated to fall, with 95% probability.

Alternative Assets: This term describes non-traditional asset classes. They include private equity, venture capital, hedge funds and real estate. Alternative assets are generally more risky than traditional assets, but they should, in theory, generate higher returns for investors.

Alternative Investments: The alternative investment universe consists of investments outside of the traditional market investments of publicly traded debt, equity, real estate and oil & gas. It includes investments ranging from hedge funds and managed futures to venture capital, private placements, and LBO funds.

Amortization: An Accounting procedure that gradually reduces the book value of an intangible asset through periodic charges to income.

AMT: Alternative Minimum Tax. A tax designed to prevent wealthy investors from using tax shelters to avoid income tax. The calculation of the AMT takes into account tax preference items.

Angel Financing: Capital raised for a private company from independently wealthy investors. This capital is generally used as seed financing.

Angel Investor: A person who provides backing to very early-stage businesses or business concepts. Angel investors are typically entrepreneurs who have become wealthy, often in technology-related industries.

Annual Return: The total percent return for the year.

Antidilution provisions: Contractual measures that allow investors to keep a constant share of a firm's equity in light of subsequent equity issues. These may give investors preemptive rights to purchase new stock at the offering price. [See Full Ratchet and weighted Average]

Arbitrage Strategies: An investment strategy that attempts to take advantage of temporary price discrepancies between securities by buying the cheaper one and selling short the more expensive one. Usually based on the use of historical relationships between instruments in different markets to predict future trends of movements in price.

Archangel: Usually an outsider hired by a syndicate of angel investors to perform due diligence on investment opportunities and coordinate allotment of investment duties among members. Archangels typically have no financial commitment to the syndicate.

Asset Allocation: The percentage allocation of an investor's total portfolio in different asset classes.

Asset Class: A broadly defined group of securities that have similar risk and return characteristics. Examples of asset class categories include: equities, fixed income, cash, etc.

Asset-backed loan: Loan, typically from a commercial bank, that is backed by asset collateral, often belonging to the entrepreneurial firm or the entrepreneur.

Automatic conversion: Immediate conversion of an investor's priority shares to ordinary shares at the time of a company's underwriting before an offering of its stock on an exchange.

Average Gain: A simple average (arithmetic mean) of the periods with a gain. It is calculated by summing the returns for gain periods (i.e., with returns greater than or equal to zero) and dividing the total by the number of gain periods.

Average Loss: A simple average (arithmetic mean) of the periods with a loss. It is calculated by summing the returns for loss periods (i.e., with returns less than zero) and dividing the total by the number of loss periods.

Average Return: A Simple average (arithmetic mean), which is calculated by summing the returns for each period and dividing the total by the number of periods. The simple average does not take the compounding effect of investment returns into account.

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