CAIA Level I key terms

The ethical framework published by CFA Institute, organized around professionalism, integrity of capital markets, duties to clients and employers, investment analysis, conflicts of interest, and responsibilities of members and candidates. It sets minimum expected behavior for investment professionals worldwide.

Combining public information with nonmaterial nonpublic information to reach an investment conclusion. Under the standards this is permitted, because no single piece of information is both material and nonpublic, so trading on the combined picture does not misuse inside information.

Client brokerage commissions used to pay for research or other services beyond trade execution. Because those commissions are client assets, their use must benefit the client, be disclosed, and be consistent with the employer's policies.

Global Investment Performance Standards: ethical rules for calculating and presenting investment performance so results are comparable across firms and time. A firm may claim compliance only after meeting all required composite construction, calculation, and disclosure provisions.

Investments outside traditional long-only stocks, bonds, and cash, including hedge funds, private equity, private debt, real assets, and structured products. They typically involve less liquidity, different fee structures, and return patterns distinct from public markets.

The extra expected return investors demand for holding assets that cannot be sold quickly without a price concession. It compensates for long lockups, limited exit routes, and the difficulty of estimating fair value.

Systematic investigation of a manager, strategy, operations, and legal structure before committing capital, plus ongoing monitoring afterward. Its purpose is to surface risks that reported performance history alone cannot reveal.

Excess return over the risk-free rate divided by the standard deviation of returns. It measures return per unit of total volatility and assumes roughly normal returns, so it understates the appeal of strategies with skewed payoffs.

A measure of a bond's price sensitivity to interest rate changes, expressed in years. It approximates the percentage price change for a one percentage point shift in yield, holding other factors constant.

The curvature of the price-yield relationship for a bond. Positive convexity means prices rise more when yields fall than they decline when yields rise, making duration a better approximation for small rate moves than large ones.

An estimate of the largest loss a portfolio is expected to suffer over a stated horizon at a given confidence level. It says nothing about how severe losses beyond that threshold may be.

The average loss conditional on losses exceeding the Value at Risk threshold, also called conditional VaR. It captures tail severity and responds to extreme outcomes that a single VaR number ignores.

The largest peak-to-trough decline in a portfolio's value over a stated period, usually quoted as a percentage. It measures the worst realized loss and how difficult recovery has been.

Excess return divided by downside deviation, which counts only returns falling below a target. Because upside volatility is ignored, it suits strategies with asymmetric, option-like return distributions better than the Sharpe ratio.

Allocating a portfolio's total risk, rather than only its capital, among strategies, managers, or positions. Each allocation's contribution to volatility or tracking error is set deliberately and monitored against limits.

A privately organized, lightly regulated investment pool that may short sell, use leverage and derivatives, and charge performance fees. Its objective is usually absolute return with limited correlation to stock and bond markets.

The highest net asset value a hedge fund has previously reached, above which incentive fees are paid. It stops a manager from collecting performance fees twice on the same gains after a drawdown.

A minimum holding period, often one to three years, during which fund investors cannot redeem. It gives the manager stable capital to hold illiquid or concentrated positions and discourages short-term inflows and outflows.

Professionally managed portfolios trading futures and forwards, mainly on commodities, currencies, interest rates, and equity indices, often through systematic trend-following models. United States managers registered to do this are called commodity trading advisors.

A strategy that buys convertible bonds or preferred shares and hedges the equity and interest rate exposure, frequently by shorting the underlying stock. Profit comes from pricing inefficiencies and the volatility of the convertible.

Buying shares of a company being acquired and, in stock-financed deals, shorting the acquirer to capture the spread between the target's price and the deal terms. The main risk is that the transaction breaks.

A strategy taking long and short positions across currencies, interest rates, equities, and commodities based on views about economic conditions and policy. Trades may be outright directional or relative value between markets.

A vehicle that invests across a portfolio of underlying hedge funds or private funds. It provides diversification and manager selection but adds another layer of fees and reduces transparency and liquidity.

A separate account a fund uses to hold illiquid or hard-to-value positions so redeeming investors do not force their sale. Only investors remaining in the fund share in the eventual proceeds.

Equity capital invested in companies that are not publicly traded, typically through buyouts, growth financing, or venture capital. Investors commit capital for long terms and expect returns from operational improvement and eventual exits.

Acquisition of a company using substantial borrowed money, with the target's assets and cash flows supporting the debt. The sponsor seeks returns from leverage, cost reduction, and a later sale or listing.

Equity investment in young, high-growth companies whose products or markets are still unproven. Returns depend on a few large exits, so the strategy shows high failure rates, staged funding, and long holding periods.

A request from a private fund manager for limited partners to fund part of their committed capital, usually when an investment is identified. Missing a call can mean penalties or loss of the related interest.

The pattern of a private fund's net cash flows or returns over its life, negative at first as fees and early losses accumulate, then positive as investments mature and are sold. It reflects back-loaded performance.

The share of a fund's profits, commonly 20%, paid to the general partner after investors recover capital plus any preferred return. It is the main way private fund managers are rewarded for performance.

Subordinated debt, often carrying warrants or conversion features, lent to companies generally more established than venture-stage borrowers. It ranks behind senior debt but ahead of common equity in the capital structure.

A contractual promise in a loan agreement that requires or restricts borrower actions, such as keeping leverage below a set level. A breach gives lenders remedies including acceleration, waivers, or renegotiated terms.

A company that owns income-producing property and, in the United States, must distribute at least 90% of taxable income to shareholders to avoid entity-level tax. Shares may trade publicly or be held privately.

A property's net operating income divided by its price or value, expressed as a percentage. It is a rough going-in yield used to compare property values and to estimate value from income.

A futures market condition in which prices for later delivery exceed prices for nearby delivery. A long position in a contango market loses value when expiring contracts are rolled into more expensive ones, all else equal.

A slice of a securitization or structured transaction carrying a defined seniority and claim on cash flows. Losses are absorbed first by the most junior tranches and only later by senior ones.

A securitized vehicle that pools loans or bonds and issues tranches with different risk and return characteristics. Cash flows are redistributed so senior investors are paid before junior investors.

A contract in which one party pays periodic premiums and the other compensates it if a referenced borrower defaults. It works like insurance on credit risk and can be used to hedge or to take exposure.

A structured product that returns the investor's principal at maturity plus a payoff linked to an index or other asset, typically built from a zero-coupon bond plus an option. Participation in upside is usually capped.