## Accredited Investor

Private hedge funds, which are exempt from registration with SEC, may only be purchased by persons who are accredited investors. Those investors are individuals who earn more than $200,000 per year (or joint income with a spouse of $300,000) or have a net worth exceeding $1 million, excluding primary residence. Accredited investors also include banks, charitable organizations, insurance companies, trusts, and employee benefit plans. Visit the SEC’s Website for complete details.

## Active Share

Percent of a fund’s portfolio that differs from its benchmark. If a manager is simply copying the holdings of a benchmark, is he or she adding value? At Crescat, our goal is not to match the performance of our benchmarks. Our investment strategies utilize diverse and uncorrelated fundamental drivers, aiming to outperform benchmarks on a risk-adjusted basis over the long run through both bull and bear markets.

## Alpha (aka Jensen’s Alpha)

Alpha is a measure of how much value is added by an active investment manager through stock picking, security selection, application of macro themes, longs versus shorts, etc. Alpha is a measure of a manager’s excess returns over a benchmark, adjusted by how much benchmark-related risk (Beta) that the manager took. All else equal, a higher Alpha is achieved when a manager outperforms the benchmark while taking less market risk. For example, if two hedge fund managers each outperformed the S&P 500 Index by 5%, but manager A took 25% less market risk than manager B (25% lower Beta), then manager A would have delivered higher risk-adjusted performance as measured by Alpha. Check out Crescat’s Alpha relative to the S&P 500 in our Global Macro Hedge Fund and in all of our strategies.

## Beta

If two securities have a high correlation (positive or negative), Beta measures the magnitude and the direction that one security is likely to move in relation to another. In finance, Beta is frequently used to measure the sensitivity of a portfolio or an investment strategy or manager compared to a benchmark. If the correlation between the manager an the benchmark is low, however, for example greater than -.25 and less than .25, then we would likely not be able to accurately predict the performance of the investment manager based upon the performance of the benchmark.

## Calmar Ratio

This ratio is calculated by dividing the annualized manager return by the max drawdown over a selected time period. This is a commonly used hedge fund measure since such funds often employ hedging strategies to protect returns in down markets; hence, the max drawdown is expected to be lower. Generally, a higher Calmar Ratio is better as it indicates the manager has higher returns and/or lower max drawdown.

## Composite

According to the Global Investment Performance Standards, a composite is a group of discretionary portfolios that collectively represent a particular investment strategy or objective.

## Correlation

Correlation is a statistical measure explaining the strength and direction of how two securities or portfolios move in relation to each other. The value of a correlation can move between -1 and +1. The closer the correlation between two securities is to +1, the stronger the relationship and the more they will tend to move in the same direction. The closer the correlation is to -1, the stronger the relationship and the more the two securities will tend to move in opposite directions. If the correlation is close to zero, the two securities will tend not to have a strong relationship. Correlation does not measure the proportion or sensitivity of the relationship between two securities, only the strength and direction. Once it is established that two securities or portfolios have a strong correlation (close to -1 or +1), then the magnitude of the relationship can be measured by Beta.

## Cumulative Return

Total amount an investment has gained (or lost) over time, expressed as a percentage. It is important to consider the context of time and comparable investments when looking at cumulative return. Comparing investments over the same time period and with similar risk profiles will result in the most relevant information.

## Cumulative Value of a Million Dollars at Inception (VAMI)

The growth in value of a $1,000 investment, including reinvestment of all profits and interest income. Crescat reports VAMI net of fees in its performance reports.

## Downside Market Capture

A measure of the manager’s performance in down markets relative to the market itself. A value of 90 suggests the manager’s loss is only nine tenths of the market’s loss during the selected time period. A market is considered down if the return for the benchmark is less than zero. The Downside Capture Ratio is calculated by dividing the return of the manager during the down market periods by the return of the market during the same periods. Generally, the lower the DMC Ratio, the better (If the manager’s DMC Ratio is negative, it means that during that specific time period, the manager’s return for that period was actually positive).

## Downside Deviation

Measure of the variation of returns that are below a certain threshold, usually zero. Standard deviation is a common measure of risk, but treats variation of negative and positive returns the same. By using downside deviation rather than standard deviation, managers are not penalized for variation in their positive returns.

## Excess Return

Returns in excess of the risk-free rate, a benchmark or in excess of another manager. A positive excess return indicates that the manager outperformed the benchmark for that period.

## Empirical Value Added Risk (VaR)

A measure of a portfolio’s exposure to reductions in value resulting from changes in prevailing interest rates. Empirical VAR calculates VAR by modeling potential value changes for a defined time horizon over a large number of possible scenarios. The result of these hundreds or even thousands of simulations is a distribution of possible outcomes. VAR is calculated from that distribution.

## Gain-Loss Deviation Ratio

The Standard Deviation of all positive returns.

## Global Investment Performance Standards (GIPS®)

GIPS is the gold standard for performance reporting in the asset management industry. It is a set of standardized, industry-wide ethical principles established by the CFA Institute that guide investment firms on how to calculate and present their investment results. When investment firms adhere to GIPS, they give investors a high level of transparency, which is key to evaluating a money manager.

## Loss Deviation

A measure of the average deviations of a negative return series; often used as a risk measure. A large downside risk implies that there have been large swings or volatility in the manager’s return series when it is below the selected hurdle rate (MAR). Downside risk (also known as downside deviation) attempts to further break down volatility between upside volatility – which is generally favorable since it implies positive outperformance – and downside volatility – which is generally unfavorable and implies loss of capital or returns below an expected or required level.

## Omega Ratio

The Omega Ratio is a risk-adjusted performance measure that was created in 2002 and contains better information about the return series than the Sharpe Ratio. While the Sharpe Ratio only takes into account the mean and variance of a return distribution, the Omega Ratio also includes information about the skew and kurtosis which is important for alternative investments such as hedge funds. Investments that have the same mean and variance can have the same Sharpe Ratio even though their downside potential can be very different. All else equal, a fund with a higher Omega Ratio will tend to have a lower propensity for extreme losses and higher probability of achieving the desired level of return. An Introduction to Omega by Keating and Shadwick is a reader-friendly academic primer on the Omega Ratio.

## Qualified Client

A qualified client is an individual that has at least $1.1 million under management with the advisor or a net worth of more than $2.2 million, excluding the value of the primary residence, at the time of the investment.

## Sharpe Ratio

Perhaps the most commonly used measure of risk-adjusted return. It measures excess return relative to the standard deviation of returns. Unfortunately, the ratio relies on the simplified assumption that returns are normally distributed. The ratio can be misleading depending on how the returns are spread out, and managers can be punished for strong returns, if they have large variation. The Omega Ratio is a more complete measure of risk-adjusted returns.

## Skewness

This measure characterizes the degree of asymmetry of a distribution around its mean. Positive skewness indicates a distribution with an asymmetric tail extending toward more positive values. Negative skewness indicates a distribution with an asymmetric tail extending toward more negative values.

## Separately Managed Account (SMA)

An SMA is an individual portfolio of securities managed by a professional money manager. Crescat offers investors the option of two SMA strategies – Crescat Large Cap and the Crescat Precious Metals SMA strategies.

## Sortino Ratio

This ratio is similar to the Sharpe Ratio, except excess returns are compared to only the downside deviation of returns. By focusing on the downside risk, a manager is not penalized for the variability of positive returns.

## Sterling Ratio

This is a return/risk ratio. Return (numerator) is defined as the Compound Annualized Rate of Return over the last 3 years. Risk (denominator) is defined as the Average Yearly Maximum Drawdown over the last 3 years less an arbitrary 10%. To calculate this average yearly drawdown, the latest 3 years (36 months) is divided into 3 separate 12-month periods and the maximum drawdown is calculated for each. Then these 3 drawdowns are averaged to produce the Average Yearly Maximum Drawdown for the 3 year period. If three years of data are not available, the available data is used.

## Tracking Error

A measure of the amount of active risk that is being taken by a manager. This statistic is computed by subtracting the return of a specified benchmark or index from the manager’s return for each period and then calculating the standard deviation of those differences. A higher tracking error indicates a higher level of risk – not necessarily a higher level of return – being taken relative to the specified benchmark. Tracking error only accounts for deviations away from the benchmark, but does not signal in which directions these deviations occur (positive or negative).

## Treynor Ratio

Similar to the Sharpe Ratio, this statistic is computed by subtracting the return of the risk-free index (typically 91-day T-bill or some other cash benchmark) from the return of the manager to determine the risk-adjusted return. This excess return is then divided by the Beta of the portfolio. This is another efficiency ratio that evaluates whether the manager is being rewarded with additional return for each additional unit of risk being taken with risk being defined by Beta, a measure of systematic risk, not Total Risk (standard deviation).

## Upside Market Capture

A measure of the manager’s performance in up markets relative to the market itself. A value of 110 suggests the manager performs ten percent better than the market when the market is up during the selected time period. The return for the market for each quarter is considered an up market if it is greater than or equal to zero. The Upside Capture Ratio is calculated by dividing the return of the manager during the up market periods by the return of the market for the same period. Generally, the higher the UMC Ratio, the better (If the manager’s UMC Ratio is negative, it means that duringthat specific time period, the manager’s return for that period was actually negative).

## Up/Down Capture Ratio

All else equal, investors should prefer managers with relatively high Upside Capture and relatively low Downside Capture compared to benchmarks and peers. The Up/Down Capture Ratio attempts to measure the tradeoff between the two. However, the Up/Down Capture Ratio will not be meaningful if Downside Capture is negative, even though negative Downside Capture is an outstanding thing in and of itself. Check out Crescat’s Up/Down Capture Ratio in the Global Macro Fund relative to the HFRX Global Hedge Fund Index.