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What Hedge Funds Really Do by Tucker Balch, Philip J. Romero

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Glossary

We thank the students in Tucker Balch’s online course Computational Investing, Part 1, for their assistance in compiling this glossary.

Alpha: A measure of an investment style’s incremental return relative to simply holding a diversified portfolio. All active management, such as hedge funds, strives for “positive alpha.”

Arbitrage: Buying a near-identical asset in one market and selling it in a different market at a higher price. This opportunity to profit will usually be exploited by profit-seeking investors, who, through their buying and selling, will “arbitrage away” price disparities.

(Arithmetical) Average rate of return: An asset’s return on investment averaged over multiple periods. If the S&P 500 returned 10 percent 3 years ...

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