Glossary of Investment Terms

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.


The HFRX Equity Hedge Index represents an investable index of hedge funds that trade both long and short in equity securities. Managers of funds in the index employ a wide variety of investment processes. They may be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios. The HFRX Equity Hedge Index is a benchmark for the Crescat Long/Short Fund.

The HFRX Global Hedge Fund Index represents a broad universe of hedge funds with the capability to trade a range of asset classes and investment strategies across the global securities markets. The index is weighted based on the distribution of assets in the global hedge fund industry. It is a trade-able index of actual hedge funds. It is a benchmark for Crescat’s Global Macro Hedge Fund Composite.

The S&P 500 Index is perhaps the most commonly followed stock market index. It is considered representative of the U.S. stock market at large. It is a market-cap-weighted index of the 500 largest and most liquid companies listed on the NYSE and NASDAQ exchanges. Although the companies are U.S. based, most of them have broad global operations so the index is representative of the broad global economy. It is a benchmark for the Crescat Large Cap Composite, the Crescat Long/Short Hedge Fund Composite, and the Crescat Global Macro Hedge Fund Composite.

The Russell 1000 is a market-cap weighted index of the 1,000 largest companies in US equity markets. It represents a broad scope of companies across all sectors of the economy. It is a commonly followed index among institutions. This index contains many of the same securities as the S&P 500 but is broader and includes some mid-cap companies. It is a benchmark for Crescat Large Cap Composite.


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.


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 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 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 Capture

Downside capture is used to evaluate how well an investment manager performed relative to an index during periods when the index has gone down. The ratio is calculated by dividing the manager’s average monthly return by the returns of the index during down months for the index. A fund with a downside capture less than 100% has done a better job of preserving wealth when the market is going down than the benchmark. A fund with a negative downside capture has actually gone up on average during down markets. Check out Crescat Global Macro Fund’s downside capture relative to the S&P 500. A low downside capture can be achieved by hedge funds, because short positions can help hedge funds outperform long-only strategies during down markets.

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

Manager’s return minus benchmark return, not adjusted for risk. Based on this measure alone, high returns could look attractive, but it is important to consider the risk taken to achieve those returns. Measures such as Alpha, Gain-Loss Ratio, Omega Ratio, Sharpe, and Sortino each have different ways of adjusting for risk.

Gain-Loss Ratio

Measures a fund’s average gain in a gain period divided by the fund’s average loss in a losing period. Periods can be monthly or quarterly depending on the data frequency.

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.

Minimum Acceptable Return (MAR)

MAR is the threshold return used in calculating many risk-adjusted performance measures, including Sharpe Ratio, Sortino Ratio, and Omega Ratio. Often, the risk-free rate of interest is used interchangeably with MAR. Traditionally, the yield on short-term US Treasury Bills is assumed to be the risk-free rate. In recent years, the risk free rate has been indistinguishable from zero.

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 million under management with the advisor or a net worth of more than $2.1 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.


A separately managed account is an account that is opened directly with a money management firm such as Crescat’s Large Cap strategy. The assets of Large Cap clients are not comingled with other assets and investors own the assets in their own names.

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. The highest Sortino Ratios are achieved when the manager produces strong performance relative to the Minimum Acceptable Return (MAR), coupled with low variation downside returns.

Tracking Error

Tracking error is a measure how closely a portfolio follows the index to which it is benchmarked. Index funds strive match the benchmark performance and therefore tend to have a low tracking error. Successful passive management is measured by low tracking error. Actively-managed portfolios, such as those managed by Crescat, expect to deviate from their benchmark with the goal of generating positive risk-adjusted returns relative to the benchmark. Successful active management is gauged by positive Alpha and a high Omega Ratio relative to that of the benchmark.

Upside Capture

Upside capture is used to evaluate how well an investment manager performed relative to an index during periods when that index has risen. The ratio is calculated by dividing the manager’s average monthly return by the returns of the index during up months for the index.

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.