28 essential terms and definitions for CAIA Level I. Each definition is written for exam preparation, covering the concepts as they are tested on the 2026 syllabus.
Alpha is the risk-adjusted excess return of an investment above what would be predicted by its exposure to systematic risk factors, representing the manager's skill in generating returns independent of market movements.α=Rp−[Rf+β(Rm−Rf)]
Backwardation is a market condition in which the futures price of a commodity is lower than the current spot price, often occurring when there is a convenience yield from holding the physical commodity.
Calmar ratio is a risk-adjusted performance measure calculated as the annualized rate of return divided by the maximum drawdown over a specified period, commonly used to evaluate hedge fund and CTA performance.Calmar=∣Maximum Drawdown∣Annualized Return
Carried interest is the share of profits (typically 20%) that a general partner of a private equity or hedge fund receives as performance-based compensation, usually subject to a preferred return hurdle and a clawback provision.
Commodity futures are standardized exchange-traded contracts obligating the buyer to purchase and the seller to deliver a specified quantity of a physical commodity at a predetermined price on a future date.
Contango is a market condition in which the futures price of a commodity is higher than the current spot price, resulting in a negative roll yield for long futures positions as contracts are rolled to later maturities.
Convertible arbitrage is a hedge fund strategy that exploits pricing inefficiencies between a convertible bond and its underlying equity, typically buying the convertible and short-selling the underlying stock.
Direct lending is a form of private credit in which non-bank lenders provide loans directly to borrowers (typically middle-market companies) without intermediation from a commercial bank, offering higher yields in exchange for illiquidity.
Drawdown is the peak-to-trough decline in the value of an investment portfolio before a new peak is achieved, measuring the magnitude of loss from a high point and used as a key risk metric for alternative investments.Drawdownt=Peak NAVNAVt−Peak NAV
Event-driven strategy is a hedge fund approach that seeks to profit from corporate events such as mergers, acquisitions, restructurings, bankruptcies, or spin-offs by taking positions based on the expected outcome of the event.
Fund of funds is an investment vehicle that allocates capital across a portfolio of underlying hedge funds or private equity funds, providing diversification and manager selection but adding an additional layer of fees.
Global macro strategy is a hedge fund approach that takes long and short positions across equity, fixed income, currency, and commodity markets based on top-down analysis of macroeconomic and geopolitical trends.
Hedge fund is a privately offered, lightly regulated pooled investment vehicle that employs a wide range of strategies (long/short, arbitrage, macro, event-driven) and may use leverage, derivatives, and short selling to generate returns.
Hurdle rate is the minimum rate of return that a fund must achieve before the general partner is entitled to receive carried interest, typically set at a fixed annual rate or a benchmark such as LIBOR/SOFR plus a spread.
Infrastructure investing involves allocating capital to physical assets that provide essential services (such as transportation, utilities, and communication networks), offering stable cash flows, inflation protection, and low correlation to traditional assets.
J-curve describes the pattern of returns in private equity where a fund typically shows negative returns in its early years (due to fees and unrealized investments) before generating positive returns as portfolio companies mature and are exited.
Leveraged buyout (LBO) is a private equity acquisition strategy in which a company is purchased using a significant proportion of borrowed funds, with the target company's assets and cash flows used to secure and repay the debt.
Long/short equity is a hedge fund strategy that takes long positions in stocks expected to appreciate and short positions in stocks expected to decline, aiming to profit from stock selection while reducing market exposure.
Management fee is the annual fee charged by the general partner for managing a fund, typically calculated as a percentage (1-2%) of committed capital during the investment period and invested capital thereafter.
Mezzanine debt is subordinated financing that ranks between senior secured debt and equity in the capital structure, typically carrying higher interest rates and often including equity warrants or conversion features as additional compensation for higher risk.
Private equity is an asset class consisting of direct investments in private companies or buyouts of public companies resulting in delisting, characterized by long holding periods, active management, and illiquidity in exchange for potentially higher returns.
Real estate investment trust (REIT) is a company that owns, operates, or finances income-producing real estate, required to distribute at least 90% of taxable income to shareholders as dividends in exchange for favorable tax treatment.
Risk parity is a portfolio allocation approach that equalizes the risk contribution of each asset class rather than allocating by capital, typically resulting in higher fixed-income and lower equity allocations compared to traditional portfolios.
Roll yield is the return generated from rolling a futures contract to the next maturity, positive in backwardated markets (buying cheaper contracts) and negative in contango markets (buying more expensive contracts).Roll Yield≈FnearFnear−Ffar
Sharpe ratio is a risk-adjusted return metric calculated as the portfolio's excess return over the risk-free rate divided by its standard deviation, widely used to compare the risk-adjusted performance of alternative investments.S=σpRp−Rf
Sortino ratio is a risk-adjusted performance measure that uses downside deviation instead of total standard deviation in the denominator, penalizing only returns that fall below a target return rather than all volatility.Sortino=σdownsideRp−Rtarget
Venture capital is a form of private equity focused on providing financing to early-stage and high-growth companies that typically lack access to public capital markets, in exchange for an equity ownership stake and active involvement in the company.
Vintage year is the year in which a private equity or venture capital fund makes its first investment or first capital call, used to group and benchmark funds for performance comparison purposes.
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