Institutional Glossary
Finance is obscured by jargon designed to justify fees. This is the unvarnished translation of the terms used to deploy and extract capital.
A - D
- Alpha: The excess return of an investment relative to its benchmark. True alpha is exceptionally rare and usually a result of structural advantage, not stock picking.
- Basis Point (BPS): One-hundredth of a percentage point (0.01%). Used because finance extracts wealth in fractions of a percent.
- Beta: A measure of an asset's volatility relative to the market. Beta = 1 means it moves with the market.
- Capitalization Rate (Cap Rate): The net operating income of a real estate asset divided by its price. The yield assuming no debt.
- Carried Interest: The share of profits (usually 20%) that the general partners of PE and hedge funds receive. Controversially taxed at lower capital gains rates.
- Drawdown: The peak-to-trough decline of a portfolio.
E - M
- EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. A proxy for cash flow, heavily manipulated by "add-backs" in private equity.
- High Water Mark: The highest peak in value that an investment fund has reached. Funds must surpass this to charge performance fees again.
- Hurdle Rate: The minimum return necessary before a fund manager can begin collecting performance fees.
- Internal Rate of Return (IRR): The annualized effective compounded return rate. Can be heavily distorted by the timing of cash flows (e.g., using subscription lines of credit).
- Multiple on Invested Capital (MOIC): Cash returned divided by cash invested. Ignores time, unlike IRR.
N - Z
- Net Operating Income (NOI): Revenue from a property minus operating expenses, before debt service and taxes.
- PFOF (Payment for Order Flow): The compensation a broker receives for routing retail trades to market makers. The reason your trades are "free."
- Pro-Rata Rights: The right of an investor to participate in future funding rounds to maintain their percentage ownership and avoid dilution.
- Sharpe Ratio: A measure of risk-adjusted return. How much excess return you got for the volatility you endured.
- Yield Curve: A line plotting yields of bonds of equal credit quality but differing maturity dates. An inversion (short term > long term) is a classic recession indicator.