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Here’s 48 Hedge Fund Terms Every Investor Should Know

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Here's 48 Hedge Fund Terms Every Investor Should Know

Here’s 48 Hedge Fund Terms Every Investor Should Know

For many investors, hedge funds appear to be shrouded in mystery.

There’s a practical reason for this. The best hedge funds are extremely careful about protecting their ideas and tactics, because they provide an important competitive advantage for making profits. An example that illustrates the paranoia around this was described in Flash Boys by Michael Lewis, where he noted that at the ultra-secretive firm Citadel, it took five ID card swipes for an employee to simply start her day.

There’s also a psychological reason for the secrecy – which is that hedge funds want to appear incredibly complex and sophisticated, so that accredited investors will part with their money in order to get exposure to them. While hedge fund tactics are often intricate and extremely lucrative, understanding how they work is not as impenetrable as it may seem.

Hedge Fund Terms Investors Should Know

Today’s infographic comes to use from StocksToTrade, and it captures 48 terms that can serve as an entry point for any investor into the mysterious world of hedge funds.

It covers essential ideas around how hedge funds make their bets, such as: arbitrage, hedging, pairs trading, alpha, and beta. The infographic also looks at hedge fund terms around measuring performance and risk, as well as words that describe fee structures and payouts.

Interestingly enough, we live during a time when modern technology has also allowed retail investors more access to these types of tactics than ever before. Take a look at this infographic on alternative investments, which gives examples of ETFs and mutual funds that mimic traditional hedge fund strategies such as long/short equity, merger arbitrage, or managed futures.

Want to learn more about how hedge funds work?

This post on WallStreetMojo outlines nine popular hedge fund strategies, or check out our favorite book on global macro investing: Inside the House of Money by Steven Drobny.

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Chart of the Week

Mapped: The Countries With the Highest Housing Bubble Risks

Which real estate markets have the highest risk of seeing a correction? These maps highlight housing bubble risks using data from four key indicators.

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Mapped: Countries With the Highest Housing Bubble Risks

With a decade-long bull market and an ultra low interest rate environment globally, it’s not surprising to see capital flock to housing assets.

For many investors, real estate is considered as good of a place as any to park money—but what happens when things get a little too frothy, and the fundamentals begin to slip away?

In recent years, experts have been closely watching several indicators that point to rising bubble risks in some housing markets. Further, they are also warning that countries like Canada and New Zealand may be overdue for a correction in housing prices.

Key Housing Market Indicators

Earlier this week, Bloomberg published results from a new study by economist Niraj Shah as he aimed to build a housing bubble dashboard.

It tracks four key metrics:

  1. House Price-Rent Ratio
    The ratio of house prices to the annualized cost of rent
  2. House Price-Income Ratio
    The ratio of house prices to household income
  3. Real House Prices
    Housing prices adjusted for inflation
  4. Credit to Households (% of GDP)
    Amount of debt held by households, compared to total economic output

Ranking high on just one of these metrics is a warning sign for a country’s housing market, while ranking high on multiple measures signals even greater fragility.

Housing Bubble Risks, by Indicator

Let’s look at each bubble risk indicator, and see how they apply to the 22 countries covered by the housing dashboard.

It should be noted that most of the measures here are shown in an index form, using the year 2015 as a base year. In other words, the data is not representative of the ratio itself—but instead, how much the ratio has risen or fallen since 2015.

1. House Price-Rent Ratio

When looking at housing prices in comparison to rents, there are four countries that stand out.

New Zealand (196.8) and Canada (195.9) have seen ratios of housing prices to rents nearly double since 2015. Meanwhile, Sweden (172.8) and Norway (168.2) are not far behind.

Elsewhere in the world, this ratio is much more in line with expectations. For example, in Portugal—where house prices have skyrocketed over recent years—rents have increased at nearly the same rate, giving the country a 99.2 score.

2. House Price-Income Ratio

There are three familiar names at the top of this bubble indicator: New Zealand (156.8), Canada (155.3), and Sweden (145.7).

In places where rents are lagging housing prices, so are the levels of household income. For how long will people afford to buy increasingly expensive houses, if their incomes continue to lag?

3. Real House Prices

Real house prices have increased in all of the 22 markets, with the exception of Italy (95.5).

For this indicator, there are five markets that stand out as having fast-rising prices: Portugal (131.8), Ireland (127.6), Netherlands (121.9), Canada (124.1), and New Zealand (121.9). The latter two (Canada/New Zealand) have appeared near the top of all three bubble indicators, so far.

4. Credit to Households (% of GDP)

Exceedingly high debt ratios point to a strain on consumer finances – and when finances are strained, the chance of a default increases.

Switzerland (128.7%), Australia (120.3%), and Denmark (115.4%) top the list here with consumer debt far exceeding country GDP levels. However, Canada still makes an appearance in the top five with a debt-to-GDP ratio of 100.7%.

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Demographics

How Different Generations Think About Investing

Each generation was shaped by unique circumstances, and these differences translate directly to the investing world as well.

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How Different Generations Think About Investing

View the full-size version of the infographic by clicking here

Every generation thinks about investing a little differently.

This is partially due to the fact that each cohort finds itself on a distinct leg of life’s journey. While boomers focus on retirement, Gen Zers are thinking about education and careers. As a result, it’s not surprising to find that investment objectives can differ by age group.

However, there are other major reasons that contribute to each unique generational view. For example, what major world events shaped the mindset of each generation? Also, what role did culture play, and how do things like economic cycles factor in?

Finding Generational Discrepancies

Today’s infographic comes to us from Raconteur, and it showcases some of the most significant differences in how generations think about investing.

Let’s dive into some of the most interesting data:

1. Investment Outlook

The majority of millennials (66%) are confident about investment opportunities in the next 12 months. This drops down to 49% when boomers are asked the same question.

2. Volatility

How did different generations of investors react to recent bouts of volatility in the market?

  • 82% of millennials made changes to their portfolios
  • 69% of Gen X made changes
  • 47% of boomers made changes
  • 32% of the Silent Generation made changes

3. Knowledge and Ability

In terms of investment knowledge, 42% of millennials considered themselves to be experts in the field. On the same question, only 23% of boomers could say the same.

4. Financial Goals

Back when they were 27 years old, 45% of Gen Xers said their primary goal was to buy a home. Compare this to just 23% of millennials that consider a home to be their primary investment objective today.

5. Managing Investments

The majority of millennials (66%) saw the ability to manage all aspects of personal finance, including investments, in the same app as being important. Only 35% of boomers agreed.

Similarly, 67% of millennials saw recommendations made by artificial intelligence as being a basic part of any investment platform. Both Gen Xers and Baby Boomers were more hesitant, with 30% seeing computer-based recommendations as being integral.

6. Impact Investing

Millennials are twice as interested in ESG (environmental, social, and governance) investing, compared to their boomer counterparts. In fact, the majority of millennials (66%) choose funds according to ESG considerations.

Reasons for Not Investing

While generations may have varying investment philosophies, they seem a little more in sync when it comes to having reasons not to invest.

StatementMillennialsGen XBoomers
Recognize future outlook would be better if they start investing72%73%57%
Want to try out investing with a low money commitment35%31%25%
Afraid of losing everything42%29%28%
Too worried about current financial situation to think about future49%46%32%
Find information about investing difficult to understand63%59%55%
Don't have enough money to start investing55%59%56%

There are some similarities in the data here – for example, non-investors of all generations seem to have an equally tough time learning about investing, and similar proportions do not believe they have the funds to start investing.

On the flipside, it seems that millennials are more worried about their financial future, while simultaneously seeing a risk of “losing everything” stemming from investing.

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