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Hedge Fund Management Cheat Sheet

The core ideas of Hedge Fund Management distilled into a single, scannable reference — perfect for review or quick lookup.

PiqCue — piqcue.com/hedge-fund-management/cheatsheet

Quick Reference

Alpha Generation

The process of producing investment returns that exceed a benchmark index on a risk-adjusted basis. Alpha represents the skill-based component of returns attributable to the portfolio manager's decisions rather than broad market movements.

Leverage

The use of borrowed capital or financial instruments to amplify the potential return of an investment. Hedge funds use leverage to increase position sizes beyond their equity base, magnifying both gains and losses.

Short Selling

The practice of borrowing securities and selling them with the expectation of repurchasing them later at a lower price. Short selling allows hedge funds to profit from declining prices and to hedge long positions in a portfolio.

High-Water Mark

A provision in hedge fund fee structures ensuring that performance fees are only charged on net new profits. If a fund loses value, the manager must recover past losses before earning incentive fees again.

Lock-Up Period

A contractual time frame during which investors in a hedge fund cannot redeem or withdraw their capital. Lock-up periods give managers the flexibility to invest in less liquid opportunities without facing redemption pressure.

Risk-Adjusted Returns

A measure of how much return an investment produces relative to the amount of risk taken. Common metrics include the Sharpe ratio, Sortino ratio, and Calmar ratio, which allow comparison across strategies with different risk profiles.

Fund of Funds

An investment vehicle that allocates capital across multiple hedge funds rather than investing directly in securities. Fund of funds provide diversification across strategies and managers but add an additional layer of fees.

Prime Brokerage

A suite of services provided by investment banks to hedge funds, including securities lending for short selling, leverage financing, trade execution, custody of assets, and operational support.

Drawdown

The peak-to-trough decline in the value of a hedge fund's portfolio before a new peak is achieved. Maximum drawdown is a critical risk metric that measures the worst loss an investor could have experienced.

Carried Interest

The share of investment profits that hedge fund managers receive as compensation, typically 20% of gains above a hurdle rate. Carried interest aligns the manager's financial incentives with investor performance.

Key Terms at a Glance

Absolute Return:An investment approach targeting positive returns in all market conditions, independent of benchmark performance.
Accredited Investor:An individual or entity meeting specific financial thresholds required by securities regulators to invest in private offerings including hedge funds.
Alpha:The excess return of a portfolio relative to its benchmark after adjusting for systematic risk exposure.
Assets Under Management (AUM):The total market value of investments managed by a hedge fund on behalf of its investors.
Beta:A measure of a portfolio's sensitivity to market movements, representing systematic or non-diversifiable risk.
Carried Interest:The share of profits that fund managers receive as incentive compensation, typically 20% of gains above a hurdle rate.
Convertible Arbitrage:A strategy that exploits pricing inefficiencies between convertible bonds and the underlying equity by going long the convertible and shorting the stock.
Distressed Debt:Investing in the debt of companies in or near bankruptcy, seeking to profit from restructuring, recovery, or liquidation outcomes.
Drawdown:The peak-to-trough decline in portfolio value before a new high is achieved, used to measure downside risk.
Due Diligence:The comprehensive investigation and analysis process conducted before investing in a hedge fund, covering investment, operational, legal, and risk dimensions.
Fund of Funds:An investment vehicle that allocates capital across multiple hedge funds to provide diversification, adding an additional layer of fees.
Gate Provision:A contractual mechanism limiting the percentage of fund capital that can be redeemed in any given period to prevent forced liquidation.
General Partner (GP):The managing entity of a hedge fund limited partnership, responsible for investment decisions and bearing unlimited liability.
Gross Exposure:The sum of all long and short positions as a percentage of fund capital, measuring total market exposure.
High-Water Mark:A provision requiring a fund to surpass its previous NAV peak before the manager can earn performance fees.

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Hedge Fund Management Cheat Sheet - Quick Reference Guide | PiqCue