Vernacular abounds in the investment world, just as it does for sports, politics, emotions and many other activities. Why this is so, is never adequately explained. What is clear is just how unclear talking in investment jargon can be for everyone operating outside that financial domain.

A few of the more interesting, but not too incorrect politically, terms are as follows:

Haircut ? a slang term coined to denote realised investor losses or a trimming of a fee or discount.

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Bip ? not the same as a blip, but one-hundredth of one percent, commonly used to describe a charge on an investment value (NAV), such as, the custody fees for the account were 35 bips (meaning .35 % of 1%) or to denote a range of value between two investments, such as credit spreads.

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TIPSs ? not the kind of tips that used to be paid in Bermuda restaurants before mandatory gratuities were put into practice. However, TIPS in the investment world refer to United States Treasury Inflation-Protected Securities

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Drips ? Hope everyone knows this one, Dividend Re-investment Plans for equities that pay dividends.

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Bottom fisher ? investors who deliberately seek out a stock at the bottom of its value cycle believing that the company will return to profitability

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Cash cow ? A metaphor for a dairy cow that requires little maintenance, little in the way of feed besides a huge open pasture, and once the cost of acquisition is over, can produce milk (and baby milk cows) for many years to come. A pure stream of cash (milk).

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Leading Lipstick Indicator ? One of my favourites, the term originally coined by Ronald Lauder (Estee Lauder cosmetics) who noticed consistently that when times were uncertain and consumer were feeling poorer with confidence decreasing, lipstick sales increased dramatically. That?s right ladies, even in times of turmoil, we need to look extra good.

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Flight to Quality ? One indication of a flight to quality is a dramatic fall of the yield on government securities (particularly US Treasuries). This, the direct result of the increased demand for them by those seeking safe harbour for their investments during market stress and volatility.

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Absolute versus relative performance. Investors struggle a bit with this terminology. Simply put, absolute performance means growing the assets above the cost base the investor started with, as in, ?Do I have more money than when I started?? Relative performance always follows a benchmark even if both are in a loss position.

Hedge funds have three broad investing strategies: Relative value/arbitrage, event driven and directional tactical.

Two of the more popular strategies that generate great press in financial circles are long/short equity and convertible arbitrage.

LONG /SHORT: Going long ? means buying and holding equities, commodities or currency with the expectation that they will rise in value.

Going Short ? Investopedia defines Short Selling

When investors buy stocks for their portfolios, the term we use for acquiring an issue is ?going long?. If, however, the investor believes a stock is about to turn downward for a period of time, the investor may sell the stock (without first buying it), or ?go short?. An investor borrows the stock from his or her brokerage, sells the stock, and later buys it back again (or covers the position) at a lower price, effectively making a profit in a downtrend.

The borrowing process is relatively simple. The investor?s broker is asked to borrow the stock from another investor, and the short seller must provide cash collateral of about 50% of the price of the short sale. Also, the short seller is responsible for any dividend that may be paid while his or her position is still open. Remember, the short seller has only borrowed the stock - someone else holds the rights that come with ownership.

Long/short equity strategies are used by an estimated 35% of all hedge fund managers on a global basis, out of the 1.2 trillion dollars totally invested in hedge funds. This strategy combines the going long philosophy of holding equities considered to increase in value, shorting equities that appear to be fundamentally misaligned with the market or technically mis-priced. Long-short strategies appear to be quite simple and effortless, but diagrams and descriptions are deceiving (see chart). Short selling strategies also include the cost of borrowing those shares (margin), investing the cash received for the sale, possible leverage interest on the long position and the calculated skill of the managers in avoiding short squeezes (a expensive proposition).

CONVERTIBLE ARBITRAGE is a market neutral investment strategy. Convertible securities are bonds that are sold with an option to convert into the same company?s stock at a predetermined or set price. For the ordinary investor, buying a convertible bond allows the generation of some interest on the bond and if the company does well, the ability to convert to a stock that is increasing in value. Arbitrageurs (a fancy name for seasoned investors who take advantage of pricing and imbalances between markets and securities) use convertible bond arbitrage to simultaneous purchase convertible securities and short sell the same issuer?s common stock. This strategy allows for profit opportunities both when bonds rise in value and equities fall in value.

In 2005, convertible arbitrage (only around 4% of global strategies) attracted a large number of market participants, creating intense competition and reducing the effectiveness of the strategy. Many readers noted that convertible arbitrageurs suffered losses in early 2005 when the credit of General Motors was downgraded at the same time Kirk Kerkorian was making an offer for GM"s stock. Since most arbitrageurs were long GM debt and short the equity, they were hurt on both sides as the value of the bonds dropped and GM share price rose.

Hedge funds have been in existence now more than 50 years, not as long as mutual funds (the first one established around 1924), but long enough. While the general public is still not totally comfortable with the concept and many myths abound, sophisticated investment managers employ their use and their strategies in increased numbers to control volatility, smooth out returns and performance, protect against downside risk and provide management by some of the best in the business. Hedge funds are here to stay.

Next week, we discuss the differences between hedge funds and mutual funds. For those interested in additional information on hedge fund strategies, Pioneer Alternative Investments http://www.pioneeraltinvest.com/ has an excellent interactive article for your review.

4 weeks to go to your investment knowledge quiz. Are you ready?

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Martha Harris Myron CPA CFP? is a Senior Relationship Manager at Argus Financial Limited. She specialises in planning for lifestyle transitions and rewarding retirements for executives and senior career professionals. DirectLine: 294 5709 Confidential email can be directed to mmyronargusfinancial.bm

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The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific individual investment advice, nor as a recommendation to buy/ sell any investment product. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.