Alternative Managed Products and Mutual Fund Performance Review

Comprehensive vocabulary flashcards covering alternative managed products, performance metrics, fee structures, and regulatory requirements in the Canadian financial services industry.

Principal-protected note (PPN)

A debt instrument with a maturity date where the issuer agrees to repay investors their principal plus interest linked to the performance of an underlying asset like common stocks or mutual funds.

Accredited investor

An individual who beneficially owns financial assets with an aggregate realizable value exceeding $1\,million$, has a net income exceeding $200,000$ ($300,000$ with a spouse), or has net assets worth at least $5\,million$.

Alternative mutual fund

Also known as liquid alternatives or liquid alts, these funds are allowed greater use of short sales, leverage, and derivatives compared to conventional mutual funds and can be sold to retail investors.

Relative value strategies

Hedge fund strategies that attempt to profit by exploiting inefficiencies or differences in the pricing of related stocks, bonds, or derivatives in different markets.

Event-driven strategies

Hedge fund strategies that seek to profit from unique events such as mergers, acquisitions, stock splits, and stock buybacks.

Directional strategies

Hedge fund strategies that bet on anticipated movements in the market prices of equities, debt securities, foreign currencies, and commodities.

High-water mark

A feature that ensures a fund manager is paid an incentive fee only on net new profits, setting a bar based on the fund's previous high value.

Hurdle rate

The minimum rate that a hedge fund must earn before its manager receives an incentive fee, often based on short-term interest rates.

Closed-end fund

A managed pool of securities traded on a stock exchange that has a fixed number of shares and does not continually issue or redeem units like open-end mutual funds.

Exchange-traded funds (ETFs)

Baskets of securities constructed like mutual funds but traded like individual stocks on an exchange, often representing a passive style of investing that tracks an index.

Tracking error

The degree to which an ETF fails to perfectly mirror the returns of its benchmark index.

Segregated fund

An insurance contract consisting of an investment that produces the return and an insurance policy covering risk, featuring death benefits and maturity guarantees.

Maturity guarantee

A feature of segregated funds promising that the holder will receive at least a partial return of the money invested, with a statutory minimum of $75\,$ over a 10-year term.

Reset option

A feature in segregated fund contracts that allows the holder to lock in accrued values and protect the full amount by resetting the 10-year maturity clock.

Probate

The official process of verifying a will as genuine; segregated fund proceeds bypass this process and pass directly to beneficiaries.

Guaranteed minimum withdrawal benefit (GMWB) plan

A specialized plan giving the holder the right to withdraw a fixed percentage (typically $7\,$) of the initial deposit every year until the entire principal is returned.

Sharpe ratio

A measure of risk-adjusted rate of return calculated as the return of the portfolio minus the risk-free rate, divided by the standard deviation: $S_p = \frac{R_p - R_f}{\sigma_p}$.

Standard deviation

A statistical measure of risk and volatility that quantifies the extent to which a fund's returns fluctuate from the mean.

Benchmark index

An index reflecting a mutual fund's investment universe, such as the S&P/TSX Composite Index, used as a standard to measure performance.

Comparison universe

Also called a performance universe or peer group, it is a collection of mutual funds with similar investment mandates and risk profiles used for relative evaluation.

Quartile ranking

A method of sorting performance into four equal parts within a peer group, where the 1st quartile represents the top $25\,$ of performers.

Survivorship bias

A bias in performance universes where defunct or unsuccessful portfolios drop out and are excluded from rankings, making survivors appear to perform better.

Alpha

A measure of a manager's performance; value is added to the portfolio if the alpha is positive, indicating returns beyond what was predicted by the manager's beta.

Style drift

The change in a manager's investment style over time, which can make it difficult to separate manager skill from coincidence.

Growth at a reasonable price (GARP)

An investment style where managers seek companies with growing earnings and high ROE but avoid stocks with high P/E ratios.

Management expense ratio (MER)

The annual total of all management fees and operating expenses divided by average net assets, expressed as a percentage.

Trading expense ratio (TER)

The amount of trading commissions incurred to manage a portfolio as a percentage of the total assets of the fund.

Dollar cost averaging

The principle of investing regular dollar amounts over time so that more units are bought when prices are low and fewer when prices are high, lowering the average per unit cost.

Canadian Investment Regulatory Organization (CIRO)

The self-regulatory organization for mutual fund and investment dealers across Canada (excluding Quebec) responsible for enforcing standards and protecting investors.

Know Your Client (KYC)

A fundamental rule requiring representatives to collect information on a client's personal/financial circumstances, investment knowledge, needs, risk profile, and time horizon.

Know Your Product (KYP)

The regulatory requirement for firms and representatives to understand the structure, features, risks, and costs of the securities they recommend to clients.

Trusted contact person (TCP)

A person appointed by a client to be contacted by their dealer in specific circumstances, such as concerns regarding the client’s possible financial abuse or diminished mental capacity.