Mathematical explanations for the world mark modern finance, and wherever math is, you’re bound to see symbols and variables.
You don’t need to know all of the equations that shape financial theory, but you’ll have a leg up if you know the Greek letters used to describe different sources of risk and return. Keep this list handy when investigating hedge funds:
Alpha: Investment return that’s different than you’d expect, given an investment’s beta, which is its exposure to market risk and return. In the hedge-fund world, alpha is used to describe the value that the fund manager adds and the extra return generated for the amount of risk that the fund takes.
But remember, alpha can be negative, meaning that the fund manager subtracts value from the fund. Some researchers aren’t sure that alpha exists at all.
Beta: The amount of risk in the overall market portfolio. The market beta is 1, so an investment with a beta of more than 1 is riskier than the market as a whole. You’d expect the investment to return more than the market in an up year and less than the market in a down year.
If beta is less than 1, the investment is less risky than the market, and if beta is negative, the investment moves in the opposite direction.
Delta: The percentage change in an investment. Delta is often used to describe how much an option changes in price when its underlying security changes in price.
Gamma: The rate of change in delta. Gamma is exposure to any change in price, positive or negative.
Sigma: Represents standard deviation, or the likelihood that any one number in a series — like a series of investment returns — will be different from the return that you expect. The higher the standard deviation, the greater the investment risk.
