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Glossary of Terms

501(c)(3) Section of the Internal Revenue Code that designates an organization as charitable and tax exempt. Organizations qualifying under this section include religious, educational, charitable, amateur athletic, scientific or literary groups, organizations testing for public safety and organizations involved in prevention of cruelty to children or animals. Most organizations seeking foundation or corporate contributions secure a Section 501(c)(3) classification from the Internal Revenue Service (IRS).

Absolute return strategies intended to be market neutral (i.e., not dependent on the overall direction of the markets) which include such underlying strategies as: distressed debt, merger arbitrage, fixed income arbitrage, convertible bond arbitrage and equity market-neutral (i.e., offsetting long and short positions).

Active management (see passive investing; passive management) The management of a portfolio whose investments may be traded at any time.

Active MSCI ex-U.S. (developed) Active (long) equity investment strategies in listed stocks of exchanges in developed economies excluding the U.S. Such international investments typically use the Morgan Stanley Capital International World ex-U.S. Index (MSCI World ex-U.S.) or a comparable index as a benchmark. The MSCI World ex-U.S. Index is a capitalization-weighted index of equities in the entire developed world other than the United States. The designation of a country as developed arises primarily as a measurement of GDP per capita. There are 22 countries within this index.

Advisory board/valuation committee A select group of limited partner representatives who advocate investors’ interests with the general partner on certain matters of fund management, including portfolio valuation and conflicts of interest.

AICPA guidelines In the summer of 2006, the American Institute of Certified Public Accounts (AICPA) released a “practice aid” intended to clarify procedures that institutions and their auditors should consider in substantiating the existence and valuation of securities that have been “fairly valued.” These are typically illiquid alternative investments such as venture capital, private equity, hedge funds and other investments that do not trade regularly on the public markets and whose valuations accordingly must be estimated. The AICPA release led to a difficult “audit season” for many nonprofit institutions in 2006, and it continues to be the subject of discussions centering around issues such as levels of transparency and valuation processes and controls.

Alignment of interests Investment goals that are rewarding for both the limited partners and the general partners. Managers who invest significant personal funds alongside institutional investors tend to think and act in the best interest of all investors.

Alpha measures nonsystematic return, or the return that cannot be attributed to the market. It shows the difference between a fund’s actual returns and its expected performance, given its level of systematic (or market) risk (as measured by beta). A positive alpha figure indicates that the fund has performed better than its beta would predict. In contrast, a negative alpha indicates the fund’s underperformance, given the expectations established by the fund’s beta. Many investors see alpha as a measurement of the value added or subtracted by a fund’s manager.

Alternative strategies A broad classification of investments that includes any investment that is considered less traditional or non-traditional (traditional assets include stock instruments and debt instruments, such as direct investments or mutual fund investments in equities, bonds, and money market instruments). Specific examples of alternative strategies include private equity, venture capital, hedge funds, distressed (or private) debt, and “real assets” (such as real estate, oil and natural gas, timber and commodity funds). Alternative investments often have a low or negative correlation to traditional assets, can contribute to lower portfolio risk (as measured by volatility), and can contribute to a higher expected return.

Annuity trust A trust that pays an agreed-upon sum of money at agreed-upon intervals, drawing from the trust’s principal when income from the trust is insufficient to make the agreed-upon payments.
Arbitrage A financial transaction or strategy that seeks to profit from a perceived price differential with respect to related instruments and typically involves the simultaneous purchase and sale of those instruments.

Asset allocation Allocating investments among different asset classes (e.g., stocks, bonds, and real estate) to find the optimal risk/reward mix. Tactical asset allocation implies a relatively short-term, and strategic asset allocation a longer-term, approach.

Asset mix The proportions of a portfolio invested in various types of investments, such as common stock, bonds, guaranteed investment contracts, real estate and cash equivalents.

Asset-backed security A fixed income instrument comprising collateralized assets that pay interest, such as consumer credit cards and automobile loans.

Average life A security may have a specific maturity date, but some of the principal due may be paid off prior to maturity creating a different average time to total principal payment, which is earlier than the original maturity date.

Balanced fund manager (balanced manager) A mutual fund manager whose investment policy is to balance the fund’s portfolio by investing in more than one asset class—typically, stocks, bonds, and cash—to obtain a good return, while minimizing risk.

Barbell portfolio A portfolio made up of short- and long-term bonds.

Barclays Capital Aggregate Bond Index An index that covers the U.S. investment-grade, fixed-rate bond market with index components for government, corporate, mortgage pass-through and asset-backed securities.

Basis risk Risk attributable to uncertain movements in the spread between futures and spot prices.

Benchmark risk (see risk relative to benchmark)

Bequest A type of donation or gift, typically via a decedent’s will or estate. Bequests and gifts are awards with few or no conditions specified. Gifts may be provided to establish an endowment or to provide direct support for existing programs. Frequently, gifts are used to support developing programs for which other funding is not available. The unique flexibility, or lack of restrictions, makes gifts attractive sources of support.

Beta is a measure of a fund’s sensitivity to market movements. A security’s beta measures the expected change in its return per one percent change in the return of the market. By definition, the beta of a benchmark index is 1.00. Accordingly, a fund with a 1.10 beta is expected to perform 10 percent better than the index in up markets and 10 percent worse in down markets, assuming all other economic factors remain constant. Conversely, a beta of 0.85 indicates that the fund is expected to perform 15 percent worse than the index in up markets and 15 percent better in down markets. A low fund beta does not imply that the fund has a low level of volatility, though; rather, a low beta means only that the fund’s market-related risk is low.

Block grant A type of mandatory grant where the recipients (normally states) have substantial authority over the type of activities to support, with minimal federal administrative restrictions. The basic premise is that states should be free to target resources and design administrative mechanisms to provide services to meet the needs of their citizens.

Board-designated funds Capital funds that have been designated and restricted by the board for a specific purpose and cannot be used for any other purpose.

Bond Evidence of a debt on which the issuing company usually promises to pay holders a specified amount of interest for a specified length of time and to repay the principal on the maturity date. A bond represents debt and its holder is a creditor of the corporation and not a part owner as is a shareholder. Utility bonds are usually secured by mortgages.

Bond escrow account Funds held by a bond trustee to pay for a specific building program in progress. These funds are either invested by the underwriting investment bank or the bond trustee and have specific covenants attached.

Bullet portfolio Most often associated with bond issues or some investment contracts, where the funds receive a fixed interest rate and are returned in a single lump sum at a fixed maturity date.

Buy-and-hold portfolio A portfolio for which the investment manager buys securities, usually bonds, with the intention of holding them for a long period of time, usually until maturity, in contrast with an actively managed portfolio. The term may also apply to common stocks such as those held by an index fund.

Calmar ratio A ratio used to measure risk-adjusted return. Determined according to this formula: (Annualized Return – Risk Free Rate) ÷ Maximum Drawdown. Also a ratio used to measure risk-adjusted return (similar to Sharpe and Sortino ratios), with the risk metric being maximum drawdown.

Capital call A term typically associated with investment partnerships such as real estate, private capital and distressed debt. When a general partner makes a portfolio investment it issues a capital call to its investors (limited partners) requesting them to forward their pro rata share of the investment based on their commitment to the fund.

Capital formation Methods for obtaining and accumulating funds for capital needs.

Capital gain Profit on the sale of an investment, which may include common stock, corporate and government bonds, real estate and other real assets. There are long-and short-term capital gains, as defined in the Internal Revenue Code. Capital losses may also occur.

Capital markets Markets in which capital funds (debt and equity) are issued and traded. Included are private placement sources of debt and equity, as well as organized markets and exchanges.

Capitalization rate A term typically associated with real estate investments, the capitalization rate is the rate of return applied to an income stream to derive the value of a property.

Captive insurance In health care institutions, a captive insurance trust is typically a wholly-owned subsidiary of a group of hospitals that companies have organized to insure their risk. A captive is essentially a self-insurance program that has assumed the formalities of an insurance company.

Carried at cost In private capital investing, managers typically reflect the value of the investments they have made at the cost they paid for them (carried at cost) until a third-party event reflects a new value, either up or down. Third-party events would include the sale of a company, an Initial Public Offering (IPO), an investment by an independent party at a higher or lower valuation, or a negative operating event that lowers an investment’s value.

Carry (or carried interest) The general partner’s share of a partnership’s net profits.

Cash and cash equivalents Assets with maturities of less than one year (e.g., Treasury bills, commercial paper, certificates of deposit and nonconvertible bonds) which are highly liquid and comparatively risk-free.

Cash management Bank services designed to help a company manage its cash more efficiently. These services include payable-through drafts, zero-balance accounts, remote disbursement accounts, account reconciliation, lockboxes, depository transfer checks, freight payment plans, wire transfers, concentration accounts, information reporting and cash management consulting.

Challenge grant A grant that provides monies in response to monies from other sources, usually according to a formula. A challenge grant may, for example, offer two dollars for every one that is obtained from a fund drive. The grant usually has a fixed upper limit, and may have a challenge minimum below which no grant will be made. This form of grant is fairly common in the arts, humanities, and some other fields, but it is less common in the sciences. A challenge grant differs from a matching grant in at least one important aspect. The amount of money that the recipient organization realizes from a challenge grant may vary widely, depending on how successful that organization is in meeting the challenge. Matching grants usually award a clearly defined amount and require that a specific sum be obtained before any award is made.

Charitable gift annuity A contract between the donor and a charity in which the donor transfers assets to the charity. The charity agrees to pay a specified sum of money each year to the donor, for a fixed period (usually life). The assets exceed the present value of the expected payments to the donor, and the charity receives the surplus (mortality tables are used to make this calculation). The donor can claim as a charitable tax deduction the difference between the present value of the expected payments and the value of the assets.

Charitable lead trust(also called Charitable Income Trust) A trust in which the donor transfers income-producing assets to a trustee and instructs the trustee to pay a fixed amount or annual percentage to charity for the term of the trust. At the end of the trust term, assets remaining in the trust are conveyed to the donor or his/her beneficiary or beneficiaries. The donor can claim as a charitable tax deduction the present value of the expected payments to charity.

Charitable remainder annuity trust A trust that pays the donor or the donor’s beneficiary an agreed-upon annual income for the life of the donor or for a specific term. The principal remaining from this type of trust eventually passes to a qualified charity.
Charitable remainder trust The assets left in a charitable trust, gift annuity, or pooled income fund that eventually pass to a qualified charity. The present value of the charitable remainder is equal to the charitable tax deduction.
Charitable remainder unitrust Under Internal Revenue Code Section 664(d)(2) and the regulations thereunder, there are three variations of the unitrust:
1) “straight” unitrust Donor irrevocably transfers money, securities or property to a separately invested trust having a charitable remainder. The trust makes payments to named beneficiaries at least annually in an amount equal to a fixed percentage (not less than 5 percent) of the net fair market value of the trust assets, determined once each year. The donor may designate himself and/or other beneficiaries to receive these payments for life, so long as the designated beneficiaries are alive at the time the trust is created. Alternatively, the trust instrument may provide for payment to be made for a term of years, not to exceed 20. At the expiration of all income interests the assets are distributed to the charitable organization(s).
2) “net income” unitrust The same as a “straight” unitrust except the payments to the beneficiary are limited to the actual income earned by the trust up to, but not exceeding, the fixed percentage stated in the trust agreement.
3) “net plus markup” unitrust Payments limited to ordinary earned income as in the “net income” unitrust, except that payments may exceed the stated percentage up to, but not exceeding, the amount required to make up any accumulated deficiencies from prior years (years in which the trust earned less than the stated percentage).

Charity In its traditional legal meaning, the word “charity” encompasses religion, education, assistance to the government, promotion of health, relief of poverty or distress and other purposes that benefit the community. Nonprofit organizations that are organized and operated to further one of these purposes generally will be recognized as exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code and will be eligible to receive tax-deductible charitable gifts.

Clawback The ability of investors to recapture a manager’s carried interest when losses late in the investment program lead to the result that the manager has been overpaid on earlier “wins”.
Collateralized mortgage obligation (CMO) A structured mortgage bond, backed by a pool of mortgages that serves as collateral for the bond, that pays interest and principal in maturity succession. The bond is repaid in series from the mortgage proceeds (i.e., principal payments go against the Series A bond {lowest interest and maturity} until it is paid off, at which time all payments go against the next series bond {Series B}). This procedure acts as call protection against a series bond with a higher interest rate and a longer maturity, since it cannot be called until the prior series is paid off.

Commitment When a limited partnership is established, each limited partner agrees to invest a certain amount of capital. This amount of money represents the limited partner’s capital commitment to the partnership.

Commodity trading adviser (CTA) A type of professional trader, typically registered with the National Futures Association, who advises investors regarding the buying and selling of commodities futures, including financial futures and options contracts.

Common stock Securities that represent an ownership interest in a corporation. A common stockholder is not a creditor of the corporation, so he or she assumes greater risk than does a creditor but shares in earnings and growth through dividends and price appreciation.

Community foundation A 501(c)(3) organization that makes grants for charitable purposes in a specific community or region. The funds available to a community foundation are usually derived from many donors and held in an endowment that is independently administered; income earned by the endowment is then used to make grants. Although a community foundation may be classified by the IRS as a private foundation, most are public charities and are thus eligible for maximum tax-deductible contributions from the general public.

Community fund An organized community program which makes annual appeals to the general public for funds that are usually not retained in an endowment but are instead used for the ongoing operational support of local agencies.

Compliance risk The possibility that existing procedures do not adequately ensure that the plan and its managers adhere to the regulations and requirements of governmental and regulatory bodies and industry standards of practice or that the recordkeeping of compliance documentation is not sufficient to show that the fund and its managers have been in compliance with those standards.
Consortium grant A grant to one institution in support of a project in which any programmatic activity is carried out through a collaborative arrangement between or among the recipient institution and one or more other institutions or organizations which are separate legal entities, administratively independent of the recipient. The involvement of the non-recipient (collaborating) institutions is that of actually performing a portion of the programmatic activity.

Convertible arbitrage A strategy that seeks to take advantage of the pricing efficiencies of the embedded option in a convertible bond. It is generally characterized by a long convertible position and corresponding short position in the underlying stock. Convertible arbitrage may also use leverage.

Convertible bond A bond or preferred stock that can be turned into common stock at a predetermined conversion rate, frequently at predetermined times. Conversion is often forced by the issuer by calling the bond or preferred stock prior to its maturity.

Convexity A bond is said to have positive convexity if its price rises more rapidly than an index in a bull market, when interest rates decline, and falls more slowly in a bear market, when interest rates rise. To be more technical, convexity explains the difference between the price change estimated by a bond's duration (see Duration) and its actual price change when market yields change. Thus it is a measure of the shape of the price/yield curve relationship. Negative convexity simply means that price behavior is worse than would be expected from a simple duration calculation.

Core is defined as any investment strategy that is intended to closely track the style and sector weights of an index.

Core portfolio A portfolio, closely resembling the structure and risk of the total market, that can be actively or passively managed.

Corporate bond A fixed income security issued by a corporation to evidence borrowing, usually with a term in excess of five years.

Corporate foundation A corporate (company-sponsored) foundation is a private foundation that derives its grant-making funds primarily from the contributions of a profit-making business. The company-sponsored foundation often maintains close ties with the donor company, but it is a separate legal organization, sometimes with its own endowment, and is subject to the same rules and regulations as other private foundations.

Corporate giving program A corporate giving (direct giving) program is a grant-making program established and administered within a profit-making company. Gifts or grants go directly to charitable organizations from the corporation. Corporate foundations/giving programs do not have a separate endowment; their expense is planned as part of the company’s annual budgeting process and usually is funded with pre-tax income. Annual grant totals generally are directly related to company profits.

Correlation coefficient A measure of how closely the returns on two asset classes move together. The maximum correlation coefficient is 1.0, meaning the returns move in unison. The minimum correlation coefficient is -1.0, meaning the returns move in unison, but in opposite directions. Positive correlation coefficients mean the movement is, on average, in the same direction; negative coefficients mean the movements are in opposite directions. A correlation coefficient of zero means that knowing the direction of one asset movement will not help predict the direction of the other asset's movement. The virtue of holding a portfolio of assets, rather than a single asset, is that low returns of one asset can be offset with high returns on the other.

Counterparty A principal to a foreign exchange, swap, or other derivative instrument, as opposed to an agent such as a broker.

Credit risk (see financial risk)

Credit/counterparty risk The potential that the issuer of a security may default or fail to honor their financial obligations to the fund or its client. The risk that a counterparty (or participant in a securities transaction) does not meet its financial obligation, thereby resulting in a financial loss for the transaction.

Cultural institution A cultural institution is an operating nonprofit (or a foundation that directly supports such an entity) that supports the arts and other cultural endeavors (e.g., museums, art galleries, symphonies, libraries). These are not grant-making organizations; rather, they are typically recipients of grants from private and public foundations.

Deal flow The number of investment opportunities that a private capital manager reviews over time. Solid deal flow (generally denoting high quality and quantity) is a hallmark of successful managers. Many successful managers frequently create their own deals.

Debt fund (see fixed income portfolio) A portfolio of debt-oriented investments (e.g., real estate mortgages) or fixed income securities (e.g., corporate bonds).

Dedicated bond portfolio A portfolio of debt-oriented securities that is structured to meet a specific liability such as the payment of benefits to a group of retirees for the remainder of their life. The portfolio is dedicated to the objective of meeting the identified liability.

Default risk (see financial risk)

Deferred payment gift annuity A charitable gift annuity in which payments to the donor are deferred until such time as they can be made at a higher rate (shorter life expectancy) and may be taxable at a lower rate.

Defined benefit pension plan An employer funded retirement fund. The funds are invested by the plan sponsor for the benefit of retired employees.

Defined contribution plan A 401(k), 403(b) or other employee-directed, voluntary retirement savings plan where contributions come from the employees’ payroll and may or may not have matching employer contributions.

Depreciation The amortization of the cost of a physical asset (property, plant and equipment) over its useful life. Annual depreciation is the amount charged each year as expense for such assets as buildings, equipment and vehicles. Accumulated depreciation is the total amount of depreciation on the organization’s financial books.

Derivative A financial instrument whose value depends upon the value of another instrument or asset (typically an index, bond, equity, currency or commodity). Examples are futures, forwards and options.

Distressed debt (see event-driven strategy) Publicly held and traded debt and equity securities, as well as bank loans, of companies and governments that are in financial “distress.” Financial distress is indicated by having filed or being near to filing for protection under Chapter 11 of the U.S. Bankruptcy Code. Distressed public debt and related bank loans trade at risk premiums generally in excess of 10 percentage points to U.S. Treasury securities of comparable duration.

Distribution A distribution occurs when the general partner distributes to the limited partners their pro rata share of cash or securities (also referred to as in-kind distribution) resulting from the realization of an investment.

Distribution committee The committee responsible for making grant decisions. For community foundations, the distribution committee is intended to be broadly representative of the community served by the foundation.

Dollar-weighted return (see Performance Calculation Methodologies)

Donation Transfer of equipment, money, goods, services, and property with or without specifications as to its use. Sometimes donation is used to designate contributions that are made with more specific intent than is usually the case with a gift, but the two terms are often used interchangeably.

Donor-advised fund A fund held by a community foundation where the donor, or a committee appointed by the donor, may recommend eligible charitable recipients for grants from the fund. The community foundation’s governing body must be free to accept or reject the recommendations.

Donor-designated fund A fund held by a community foundation where the donor has specified that the fund’s income or assets be used for the benefit of one or more specific public charities. These funds are sometimes established by a transfer of assets by a public charity to a fund designated for its own benefit, in which case they may be known as grantee endowments. The community foundation’s governing body must have the power to redirect resources in the fund if it determines that the donor’s restriction is unnecessary, incapable of fulfillment or inconsistent with the charitable needs of the community or area served.

Drawdown, maximum drawdown In hedge fund investing, a measure of a losing period during an investment record. It is calculated as the percent change in NAV from peak to trough. This usage is different from that in private capital where drawdown refers to the amount of committed capital called by the partnership.

Drawdown/takedown schedule In private capital investing, the timing plan providing for the actual transfer of investment funds from the limited partner to the general partner. Understanding an approximate timing schedule of takedowns allows investors to plan fund moves and model the actual invested dollars in conjunction with the rest of their portfolio.

Duration measures the price volatility of a bond relative to a change in the general level of interest rates. It is the weighted average term-to-maturity of a bond taking into account the coupon payments and the timing of cash flows. The higher the duration number, the greater the risk and potential reward. Duration is considered a more sophisticated measure of interest-rate sensitivity than average maturity.

EAFE The Europe, Australia and Far East Index from Morgan Stanley Capital International. An unmanaged, market-value weighted index designed to measure the overall condition of overseas markets.

Emerging growth fund (see emerging growth stock; emerging markets fund) A fund that consists of the stocks of emerging growth companies, typically higher risk stocks in defined market segments such as high tech and medical technology.

Emerging growth stock (see emerging growth fund) The stock of a relatively small company that is growing very rapidly but is not large enough or has not been in business long enough to be of investment quality.

Emerging markets fund (see emerging growth fund) A fund that consists of investments in markets of emerging countries, such as some of those in Southeast Asia and Central and South America.

Endowment (see quasi-endowment; term endowment; true endowment) The permanent funds of a nonprofit institution, consisting of cash, securities or property. Income from endowment is used to help finance the ongoing operations of the institution. “True” endowment is that portion of the funds that are commonly restricted as to use of principal and/or income. Not all endowments are true endowments, as some may be funds functioning as endowments by vote of the governing board.

Environmental, Social and Corporate Governance (ESG) is a generic term used in capital markets and used by investors to evaluate corporate behavior and to determine the future financial performance of companies.
ESG factors are a subset of non-financial performance indicators that includes sustainable, ethical and corporate governance issues such as managing the company’s carbon footprint and ensuring there are systems in place to ensure accountability.
Source: www.unpri.org

Equity, equities (stock) 1)The total ownership interest in a company of all common and preferred stockholders. 2) Ownership interests in companies, often producing current income paid in the form of quarterly dividends, that can be traded in public equity markets. As an asset class, may include convertible bonds (if held as an opportunistic means of eventually acquiring a company’s stock) and warrants, rights, options and futures (if the underlying assets are equities).

Equity derivative Any financial instrument, such as options or futures, priced off of individual stocks or groups of stocks.

Equity market neutral A strategy designed to exploit equity price inefficiencies. It typically involves using balanced long and short positions in equity markets to insulate the portfolio from overall market risk. Equity market portfolios are often designed to be neutral relative to beta, sector, industry, market capitalization, and style, among other factors. Leverage may be applied to enhance returns.

Equity portfolio A portfolio of equity-oriented securities such as common stock or equity real estate.

Equity real estate The ownership interest possessed by shareholders in a real estate investment.

Event-driven strategy Seeks to take advantage of anticipated corporate events and to capture price movement generated by these events. Two of the better known event-driven strategies are merger arbitrage and distressed securities.

Event risk The risk that the value of a security or other instrument will change due to an unexpected event, such as a takeover, a corporate restructuring, an unanticipated change or event in the market environment, or a natural disaster or change in the regulatory environment.

Exit strategy The long-term plan or options a private capital manager has to liquidate an investment and lock in desirable returns, usually through an Initial Public Offering (IPO) or sale to/merger with another company.

Family foundation An independent private foundation whose funds are derived from members of a single family. Family members often serve as officers or board members of family foundations and have a significant role in their grant-making decisions.

Fiduciary A person, committee or institution that holds assets in trust for another. The property may be used or invested for the benefit of the owner, depending on the agreement.

Fiduciary risk The potential exposure of fiduciaries to legal and regulatory actions precipitated by a breakdown in controls, or the failure to execute due diligence on behalf of the beneficiaries.

Financial risk (credit risk) The possibility that a borrower will default, i.e., fail to repay principal and interest in a timely manner. Also called default risk.

Fiscal year (FY) Accounting period covering 12 consecutive months, 52 consecutive weeks, 13 four-week periods, or 365 consecutive days at the end of which the books are closed and profit and loss are determined. An institution’s fiscal year is often, but not necessarily the same as the calendar year.

Fixed income arbitrage A strategy to capture the disparities of pricing across the global fixed income markets and related derivatives. Some of the more common fixed income arbitrage strategies find opportunity in yield curve anomalies, volatility differences and bond futures versus the underlying bonds. Leverage is often used to enhance returns.

Fixed income portfolio A portfolio of fixed income securities, such as marketable bonds, private placements, real estate mortgages and guaranteed investment contracts.

Form 990/Form 990-PF The IRS forms filed annually by public charities and private foundations, respectively. The letters PF stand for private foundation. The IRS uses this form to assess compliance with the Internal Revenue Code. Both forms list organization assets, receipts, expenditures and compensation of officers. Form 990-PF includes a list of grants made during the year by the private foundation.

Foundation An entity which exists to support a charitable institution and which is funded by an endowment or donations.

Funded depreciation Refers to setting aside and investing accumulated depreciation so that these monies can be used for replacement and renovation of fixed assets.

Fund of funds An approach to investing in which a manager invests in various funds formed by other investment managers. The benefits of this approach include diversification, the expertise of the fund-of-funds manager, access to hedge fund managers who may be otherwise unavailable and a less intense commitment of staff resources by the investor.

Fundamental analysis Research with the goal of predicting stock value that focuses on such determinants as earnings and dividend prospects, expectations for future interest rates, and risk evaluation of the firm.

Futures contract A standardized legal agreement to transact in either physical or financial assets at a specific delivery or maturity date, for an agreed-upon price, called the futures price, to be paid at contract maturity.

General partner The investment professionals at a hedge fund or private capital firm—and/or a separate legal entity owned by them—are often referred to as the General Partner. In exchange for its investment management service, the General Partner firm earns fees and collects a percentage of the limited partnership’s net profits.

General purpose foundation An independent private foundation that awards grants in many different fields of interest.

Gift and bequests are awards given with few or no conditions specified. Gifts may be provided to establish an endowment or to provide direct support for existing programs. Frequently, gifts are used to support developing programs for which other funding is not available. The unique flexibility, or lack of restrictions, makes gifts attractive sources of support.

Global macro A global, top-down approach to investing in which managers will take long or short positions in fixed income, equity, currency and commodity markets.

Global portfolio (see international portfolio) An investment portfolio (of equities or bonds) that can invest in U.S. and non-U.S. markets.

Government bond A security issued by a federal, state, or city government to evidence borrowing, with a term usually in excess of ten years.

Grant A type of financial assistance awarded to an organization for the conduct of research or other program as specified in an approved proposal. A grant, as opposed to a cooperative agreement, is used whenever the awarding office anticipates no substantial program involvement with the recipient during the performance of the activity.

Grantee financial report A report detailing how grant funds were used by an organization. Many corporate grant-makers require this kind of report from grantees. A financial report generally includes a listing of all expenditures from grant funds as well as an overall organizational financial report covering revenue and expenses, assets and liabilities. Some funders may require an audited financial report.

Growth stock Stock in a company that has shown better-than-average growth in earnings and is expected to continue to do so. It can pay little or no dividends but is expected to have growth potential over an extended period of time.

Health system classification There are seven types of health systems:

  • Centralized health system A delivery system in which the system centrally organizes individual hospital service delivery, physician arrangements and insurance product development. The number of different products/services offered across the system is moderate.
  • Moderately centralized health system A delivery system that is distinguished by the presence of both centralized and decentralized activity for hospital services, physician arrangements and insurance product development. Within this group, hospital services are relatively decentralized with individual hospitals having discretion over the array of services they offer. For example, a system within this group may have centralized care of expensive, high technology services, such as open heart surgery, but allows individual hospitals to provide an array of other health services based on local needs. The number of different products/services that is offered across the system is moderate.
  • Decentralized health system A delivery system with a high degree of decentralized hospital services, physician arrangements and insurance product development. Within this group, systems may lack an overarching structure for coordination. Services and product differentiation are hard to achieve. In this group, the system may simply service a role in sharing information and providing administrative support to highly developed local delivery systems centered around hospitals. (However, in terms of finance, there may be some structure for central management of investable assets.)
  • Independent hospital system A delivery system with limited differentiation in hospital services, physician arrangements, and insurance product development. These systems are largely horizontal affiliations of autonomous hospitals. (There usually is no consolidation of assets.)
    integrated delivery system A local or regional healthcare network that provides a full range of system services for all aspects of healthcare in a specific geographic area. Also called community care network.
  • Horizontal integration A linkage or network of the same types of providers, i.e., a multi-organizational system composed of acute care hospitals. A competitive strategy used by some hospitals to control the geographic distribution of healthcare services.
    vertical integration A healthcare system that provides a range of care such as outpatient, acute hospital, long-term care, home and hospice care, usually through partnerships, joint ventures and contractual arrangements.

Healthcare foundation A healthcare foundation may be either:

  • Autonomous A separate, self-governed foundation created when a for-profit company buys a not-for-profit hospital or healthcare organization (e.g., Blue Cross/Blue Shield). It generally makes independent investment decisions and supports a variety of healthcare programs in the community.
  • Supporting A unit of a hospital system (single- or multi-hospital) devoted to fundraising and other related activities. Governance may be only semi-autonomous and investment decisions are often under the direction of the hospital/system’s CFO. Income is used to support programs of the hospital/system. (It can be used as a means of sheltering investment assets for the hospital/system.)

Healthcare system To reflect the diversity that exists among healthcare organizations, the AHA Annual Guide uses the term healthcare system to identify both multi-hospital and diversified single hospital systems.

  • Multi-hospital system A multi-hospital healthcare system is two or more hospitals owned, leased, sponsored, or contract managed by a central organization.
  • Single hospital system Single, freestanding member hospitals may be categorized as healthcare systems by bringing into membership three or more, and at least 25 percent, of their owned or leased non-hospital preacute and postacute healthcare organizations. Organizations provide (or provide and finance) diagnostic, therapeutic, and/or consultative patient or client services that normally precede or follow acute, inpatient, hospitalization or that serve to prevent or substitute for such hospitalization. (An example might be a freestanding surgical center, behavioral treatment center, etc., owned or managed by a hospital.) These services are provided in either a freestanding facility not eligible for licensure as a hospital under state statute or through one that is a subsidiary of a hospital (such as a nursing home).

Hedge funds usually a limited partnership, used by wealthy individuals and institutions. Hedge funds are allowed to use aggressive strategies including selling short, leverage, program trading, swaps, arbitrage and derivatives. Since most are restricted by law to less than 100 investors, the minimum investment is typically $1 million. The general partner usually receives performance-based compensation and invests significantly in the partnership.

HEPI The Higher Education Price Index, which reports price information for the goods and services purchased by colleges and universities for their current operations. Colleges and universities use these measures to analyze the impact of inflation on their operations as a starting point for securing additional revenues to meet expected higher costs, so as to preserve their purchasing power.

High-yield bond (junk bond) A lower-quality rated bond, rated BB or lower by Standard & Poor’s and Ba or lower by Moody’s, is called high-yield because the interest rate is higher than average to compensate investors for taking higher-than-average risk.

HR7 A bill introduced to Congress in 2001, designed to provide incentives for charitable contributions by individuals and businesses, to improve the effectiveness and efficiency of government program delivery to individuals and families in need, and to enhance the ability of low-income Americans to gain financial security by building assets.

Hurdle rate The minimum investment return a fund must exceed before a performance or incentive fee can be charged.

Income stabilization reserve A percentage of the total withdrawal set aside in a separate fund to be used to augment spending in a down year. Employed as a smoothing device to lessen any decrease in the transfer to operating budget in a given year.

Independent foundation These private foundations are usually founded by one individual, often by bequest. They are occasionally termed “non-operating” because they do not run their own programs. Sometimes individuals or groups of people, such as family members, form a foundation while the donors are still living. Many large independent foundations, such as the Ford Foundation, are no longer governed by members of the original donor’s family but are run by boards made up of community, business and academic leaders. Private foundations make grants to other tax-exempt organizations to carry out their charitable purposes. Private foundations must make charitable expenditures of approximately 5 percent of the market value of their assets each year. Although exempt from federal income tax, private foundations must pay a yearly excise tax of 1 or 2 percent of their net investment income.

Index fund (see international index fund) A portfolio of stocks structured to replicate the performance of a commonly used index, such as the S&P 500.

Indexing (see passive investing; passive management) A passive investment strategy in which a portfolio is designed to mirror the performance of a stock index, such as the S&P 500. Also, tying taxes, wages or other measures to an index.

Initial public offering (IPO) In an IPO, a formerly private company offers stock to the public for the first time.

In-kind contribution (see third-party in-kind contribution) Contributions or assistance in a form other than money. Real property, equipment, materials, or services of recognized value that are offered in lieu of cash.

In-kind distribution A distribution to limited partners in the form of public shares, as opposed to cash. When distributed, these public shares are typically freely tradable and can be sold for cash.

Intergenerational equity A concept generally associated with spending policies that states that current beneficiaries should be neither advantaged nor disadvantaged relative to future beneficiaries. In order to achieve intergenerational equity, the endowment or equivalent investment fund must in real terms (i.e. adjusted for inflation) maintain its value over a period of time.

Internal rate of return (IRR) represents an annualized “dollar-weighted” rate of return on an investment. IRR calculation takes into account the cost of the investment, its current value and any intermediate cash inflows and outflows that occur over time. IRR differs from the traditional “time-weighted” rate of return used in public markets because IRR takes into account the timing of the flow of funds. In the public markets, the time-weighted rate of return measures the return between two dates and does not factor in an investor’s inflows (investments) or outflows (withdrawals).

International index fund (see index fund) A portfolio of stocks structured to replicate an index of international securities such as the MSCI World ex-U.S. Index or MSCI EAFE Index.

International portfolio (see global portfolio) An investment portfolio (of equities or bonds) that can invest only in non-U.S. markets.

Investment return The total amount that an investor or an investment fund earns from its investments, including both realized and unrealized capital gains (appreciation/depreciation) and income (dividends and interest).

J curve During the first few years of certain private partnerships, returns are often negative, as expenses of the partnership outweigh portfolio appreciation. This trend reverses itself as successful investments emerge and are sold or written up. Plotted as a graph of value versus time, this often resembles a "J".

Junk bond (see high-yield bond)

Ladder portfolio A portfolio made up of securities that mature in equal amounts each year from (for example) 1-20 years.

Large cap fund A fund that invests in stocks with larger market capitalizations, generally $5 billion or more.

Leveraged buyout (LBO) The purchase of a controlling interest in a corporation in which a significant portion of the purchase price is funded with debt (leverage).

Limited partner An investor in a limited partnership (the legal structure most often used in private capital, real estate, hedge funds, distressed debt and other alternative investment strategies) who has limited liability and is not involved in the day-to-day operations of the underlying investments. By the terms of the limited partnership agreement, limited partners do not participate in management and cannot lose more than their capital contribution.

Limited partnership The legal structure most often used in private capital, real estate, hedge funds, distressed debt and other alternative investment strategies. This vehicle is formed by a general partner who manages the investments of the partnership and limited partners who invest their capital in the partnership.

Limited partnership agreement The legal document that governs the relationship between the general partner and the limited partners in a fund.

Liquidity risk Covers the failure to maintain sufficient funds (cash and marketable securities) to meet short-term obligations. Also, market liquidity risk is the difficulty in liquidating certain investments due to the lack of active markets in these securities.

Lock-up The time period for which investors are precluded from withdrawing or redeeming their investments in a fund.

Long/short equity funds take long and short positions in listed equities—generally with a net long position. Managers seek to find (buy) stocks which are “undervalued” by the market and short stocks whose prices are “overvalued” by the market.

Macro managers use long and short strategies based on their view of the overall market direction as influenced by major global economic trends and events. Investments can include stocks, bonds, currencies, and commodities in the form of cash or derivatives instruments of both developed and emerging economies. Macro strategies often use moderate amounts of leverage.

Management Buyout (MBO) The purchase of a controlling interest in a corporation by its management team, usually in conjunction with a private equity firm. In an MBO, a significant portion of the purchase price is funded with debt.

Manager, investment manager A firm, committee or individual, inside or outside an institution responsible for making decisions to buy, hold or sell assets. May also be called a money manager or investment adviser.

Market risk The possibility of loss due to large movements in market prices (e.g., due to changes in interest rates, foreign exchange rates, volatility, correlation between markets, capital flows).

Marketable securities Publicly traded securities, such as stocks, bonds or notes, which, as such, are easily bought and sold in the marketplace and readily convertible to cash.

Matching grant A grant that requires that a specified portion of the cost of the supported item of equipment or project be obtained from other sources. The required match may be more or less than the amount of the grant. Some matching grants require that the additional funds be obtained from sources outside the recipient organization. Many matching grants are paid in installments, the payments coinciding with the attainment of pre-specified levels of additional funding. Matching grants are very common in the sciences, especially for equipment. They are the standard practice in some government agencies.

Mean The mean return is the expected value of all the likely returns of investments that make up a portfolio. The mean represents the average annualized monthly total return from which the standard deviation is calculated.

Merger arbitrage (see event-driven strategy) Long and short positions are held in both companies that are involved in a merger or acquisition. Merger arbitrageurs are typically long the stock of the company being acquired and short the stock of the acquirer. The principal risk of this strategy is deal risk.

Mezzanine debt Broadly defined, mezzanine is the level of capital that sits between senior debt and equity. Mezzanine securities typically take the form of unsecured subordinated debt with high current coupon payments and equity participation in the form of warrants. Mezzanine can also take the form of preferred stock. Mezzanine is subordinated to the other debt in the capital structure in terms of its right to receive interest and principal or proceeds from liquidation. Although mezzanine is used for recapitalizations and growth financings, the majority of mezzanine debt is issued in conjunction with change of control transactions sponsored by private equity firms. The addition of mezzanine to a buyout allows the equity sponsor to lever its returns and put fewer equity dollars into a deal.

Mid-cap fund A fund that specializes in stocks with market capitalizations generally in the range of $2 billion to $10 billion.

Modeling risk The potential for loss due to actions taken or to policies implemented based on views of the world, in general, and the investment community, in particular, that are derived from improper models. These views are derived from representation(s) of reality that do not capture all significantly relevant information or are inappropriately applied throughout the investment program.

Money market fund (MMF) A fund managed by an investment banking firm, investment manager, or insurance company, in which short-term funds of individuals, institutions, and corporations may be invested. These funds are invested in money market instruments.

Money market instrument A short-term debt security, including Treasury bills, bank CDs, commercial paper, Eurodollar CDs, and Yankee CDs, among others. Money market instruments have maturities of a year or less.

Mortgage-backed security A security for which investors receive payments out of the interest and principal on the underlying mortgage.

MSCI World ex-U.S. Index The non-U.S. developed market index from Morgan Stanley Capital International. An unmanaged, market-value weighted index designed to represent the opportunity set and returns of the large and mid-cap portions of these markets. As with any index, an investor can use this as a benchmark and choose to invest actively or passively.

Multiple  1) The purchase price of a company divided by a measure of earnings, usually earnings before interest, taxes, depreciation and amortization (EBITDA) or pre-tax income. Managers try to pay the lowest possible multiple for companies and use it as a measure of comparison between investments. 2) Multiple (or multiple on investment) can also refer to the multiplier indicating how an investment has grown in value.

Multi-strategy fund A fund providing exposure, in a single investment, to several investment styles and strategies in addition to a disciplined asset allocation process and ongoing rebalancing. A multi-strategy fund seeks to add alpha over a full market cycle, while providing significant risk reduction through diversification of manager and investment styles.

Mutual fund An investment company or trust in which a number of investors pool their funds and receive units in the fund that are priced daily. There are many types of mutual funds: stock funds, bond funds, money market funds, and closed- and open-end investment funds. Participants in these funds also cover a wide range of investors (e.g., individuals, pension funds, and trust funds).

Net Asset Value (NAV) represents the market value or price of one fund share. It is calculated by dividing the fund's total net assets by the total number of shares outstanding. Except for money market funds, which are pegged to a constant $1.00 NAV, a fund's NAV may change every day to reflect changes in the value of its portfolio holdings, which in turn respond to changing market conditions. Further, many funds are open-ended, meaning that they allow for daily purchases and redemptions, which affects the total number of shares outstanding.

Operating foundation A 501(c)(3) organization classified by the IRS as a private foundation whose primary purpose is to conduct research, social welfare, or other programs determined by its governing body or establishment charter. An operating foundation may make grants, but the amount of grants awarded generally is small relative to the funds used for the foundation’s own programs.

Operating funds Generally those short-or intermediate-term funds used for the day-to-day general operation of an institution.

Operational risk The potential for discontinuity due to the possibility of a breakdown in operational procedures particularly as they relate to a process break-down; this is distinct from the design, implementation, and maintenance of computerized information systems, e.g., errors resulting from a lack of reviewer function to catch errors, from incorrect data and/or lack of adequate staffing/backup.

Opportunistic An investment philosophy which implies an ability to be intuitive, to "see" patterns of valuations, to create portfolios that fit market circumstances and to execute cost-effective transactions.

Opportunistic investing is not synonymous with market timing, which is an investment approach that based on the flawed idea that one can make tactical asset allocation shifts outside of policy bands based on perceived superior market knowledge.

Option The right, but not the obligation, to buy or sell a specific amount of a given stock, commodity, currency, index or debt at a specified price during a specified period of time.

Passive account An account of stocks and/or bonds that is not actively managed.

Passive investing (see active management; indexing; passive management) A process that creates a portfolio of stock or bonds, not actively traded, that will replicate as closely as possible the performance of standard market indices such as the S&P 500 for stock or the Lehman Brothers corporate and government index for bonds.

Passive management (see active management; indexing; passive investing) Assets that are not traded actively but set up and held in an index fund.

Performance Calculation Methodologies:

  • Time-weighted rate of return methodology is the industry standard for calculating comparative performance of portfolios of publicly-traded securities. This method allows the evaluation of investment management skill between any two time periods without regard to the total amount invested at any time during that period. The measure must be independent of the total amount invested because the money manager normally does not control the inflow or outflow of money. This methodology is based on the assumption that portfolio investments have total liquidity to accommodate cash flows without distorting the performance results.
  • Dollar-weighted or internal rate of return (IRR) methodology is the recommended measurement of performance for private equity investments. The IRR is the annualized implied discount rate calculated from a series of cash flows. It is the return that equates the present value of all invested capital in an investment to the present value of all returns. This methodology is preferred for private equity investments for several reasons. First, control of cash flow is in the investment manager's (General Partner's) hands, negating the need for making time-weighted cash flow adjustments for purposes of equitable comparisons. Second, the cash flow pattern inherent in the life cycle of a private equity investment may create distortions on a time-weighted rate of return that are not indicative of true investment performance. For example, the initial funding in partnerships may be used for expenses that result in a very large percentage loss (the loss sometimes approaches -100 percent) on a very small investment base in the first few periods. A time-weighted methodology would make all subsequent linked returns approximately -100 percent regardless of large cash flows later on. Finally, there is no trade-based pricing mechanism to determine a period-end value for private equities, as exists in the public markets. Because only cash flows and the closing market value are used in IRR calculations, the return is not affected by interim pricing inaccuracies, as would be the case for a time-weighted rate of return.

Performance measurement Various techniques for measuring the total rate of return (income received plus or minus changes in market value between two dates) of a pension or profit-sharing plan and of investment managers, generally in comparison with other plans and managers having similar investment objectives.

Performance returns 

  • Gross returns are returns prior to adjustments for any manager fees. Gross returns are typically used for peer group, benchmark and universe comparison purposes.
  • Adjusted gross returns are returns adjusted for underlying manager (sub advisor fees), but not adjusted for management and performance fees.
  • Net returns are returns adjusted for all manager fees.

Philanthropy is defined in different ways. The origin of the word philanthropy is Greek and means love for mankind. Today, philanthropy includes the concept of voluntary giving by an individual or group to promote the common good. Philanthropy also commonly refers to grants of money given by foundations to nonprofit organizations. Philanthropy addresses the contribution of an individual or group to other organizations that in turn work for the causes of poverty or social problems, improving the quality of life for all citizens. Philanthropic giving supports a variety of activities, including research, health, education, arts and culture, as well as alleviating poverty.

Policy portfolio A portfolio of investment assets designed to achieve the financial and investment objectives of an institution over the long term. Policy portfolios are typically established by an investment committee which sets target percentages for each asset class and strategy selected for inclusion.

Portable alpha The inclusion of a non-correlated strategy (i.e., one whose returns are independent of market performance) within an existing portfolio in order to improve risk-adjusted returns. The word “portable” is used because the strategy can be applied without affecting the style under which a particular portfolio is being managed.

Portfolio combined holdings of multiple stocks, bonds, commodities, real estate investments, cash equivalents or other assets by an individual or institutional investor. The purpose of a portfolio is to reduce risk by diversification.

Portfolio diagnostics An analytical performance measurement approach that segregates a manager’s investment performance into components such as value added from securities selection and value added from market timing.

Portfolio optimization A process whereby an investor’s bond portfolio is restructured to match anticipated cash inflow and outflow. Some reinvestment of early cash receipts is allowed.

Portfolio restructuring The rebalancing of a large volume of equity in a portfolio at one time by selling baskets of stock and reinvesting the proceeds in other equity, debt, or cash securities.

Preferred return Generally speaking, the minimum compounded return that must be generated for investors prior to a general partner receiving carried interest. Preferred returns, when offered, usually range from six to eight percent, and seek to ensure that investors receive a minimum return on their investment prior to the manager benefiting from investment gains.

Preferred stock A class of favored stock whose holders have a claim on the company’s earnings before payment can be made to common stockholders. Preferred stockholders are usually entitled to dividends at a specified rate, when declared by the board of directors, before payment is made to common stockholders, and they usually have priority if the company is liquidated; however, preferred stockholders generally do not have voting rights.

Price/book ratio of a company is calculated by dividing the market price of its stock by the company's per-share book value. The P/B ratio of a company relates the per-share market price of the company's stock to its per-share book value, the historical accounting value of the company's assets. This figure may not always represent the real value of a company because it excludes such intangible assets as patents and trademarks. In theory, a high P/B ratio indicates that the price of the stock exceeds the actual worth of the company's assets, while a low P/B ratio would indicate that the stock is a bargain.

Price/cash flow ratio represents the amount of money an investor is willing to pay for a dollar of cash generated from a particular company's operations. Price/cash flow shows the ability of a business to generate cash and can be an effective gauge of liquidity and solvency. This is not a stand-alone statistic, however, and should be used in conjunction with the P/E ratio.

Price/earnings ratio of a stock is calculated by dividing the current price of the stock by its trailing 12 months' earnings per share. The P/E ratio relates the price of the stock to the per-share earnings of the company. A high P/E generally indicates that the market is paying more to obtain the stock because it has confidence in the company's ability to increase its earnings. Conversely, a low P/E often indicates that the market has less confidence that the company's earnings will increase rapidly or steadily, and therefore will not pay as much for its stock. In most cases, a fund with a high average P/E ratio has paid a premium for stocks that have a high potential for increased earnings. If the fund's average P/E is low, the manager may believe that the stocks have an overlooked or undervalued potential for appreciation. A P/E ratio calculated using a forecast of future earnings is called a forward P/E.

Principles for Responsible Investment (PRI) is an international network of investors working together to put the six Principles for Responsible Investment into practice, which is supported by the United Nations. Its goal is to understand the implications of sustainability for investors and support signatories to incorporate these issues into their investment decision making and ownership practices. In implementing the Principles, signatories contribute to the development of a more sustainable global financial system. (see www.unpri.org for additional information)
Source: http://lexicon.ft.com/Term?term=ESG

Private equity Equity capital invested in a private company.

Private foundation A nongovernmental, nonprofit organization with funds (usually from a single source, such as an individual, family, or corporation) and program managed by its own trustees or directors.

Private foundations are established to maintain or aid social, educational, religious, or other charitable activities serving the common welfare, primarily through the making of grants.

Private operating foundation uses the bulk of its resources to provide charitable services or run charitable programs of its own. It makes few, if any, grants to outside organizations and, like private independent and private family foundations, it generally does not raise funds from the public.

Private placement A distribution of securities (including interests in commingled funds) made in a private manner and only to qualified investors. A private placement does not require registration with the SEC and is not offered to the public.

Program-related investment (PRI) A loan or other investment (as distinguished from a grant) made by a foundation to another organization for a project related to the foundation’s philanthropic purposes and interests.

Proxy voting disclosure In an effort to improve the transparency of proxy voting by mutual funds and other registered investment vehicles, the SEC now requires registered investment management companies to provide disclosure about how they vote proxies relating to portfolio securities they hold. These amendments require registered investment management companies to disclose the policies and procedures that they use to determine how to vote proxies relating to portfolio securities. The amendments also require registered investment management companies to file with the Commission and to make available to shareholders the specific proxy votes that they cast in shareholder meetings of issuers of portfolio securities. The intent of the rule is to encourage funds to become more engaged in corporate governance of issuers held in their portfolio.

Proxy voting policy is a document that provides shareholders with information about issues to be discussed and voted upon at a stockholders’ meeting. Shareholders may attend the meeting and register their votes in person or vote by sending in proxy ballots on the various matters scheduled to come before the meeting. As investors and shareholders, nonprofits are frequently confronted with the issue of whether they should vote their shares as recommended by the company’s management or analyze each issue in light of the institution’s mission. Some operating charities have adopted policies by which they either (i) vote their own proxies, (ii) assign the responsibility to a third party or (iii) have their investment managers vote the proxies, usually in accord with guidelines provided by the institution.

Public charity A nonprofit organization that qualifies for tax-exempt status under section 501(c)(3) of the Internal Revenue Code. Public charities are the recipients of most foundation and corporate grants. Some public charities also make grants. Religious, educational and medical institutions are deemed to be public charities.

Public foundation Legally classified as “public charities,” public foundations are publicly supported nonprofit organizations and are predominantly funded by contributions from individuals, corporations, governmental units and private foundations. As distinguished from most public charities, public foundations focus more on grant-making than on providing direct charitable services.

Public support test There are two public support tests, both of which are designed to ensure that a charitable organization is responsive to the general public rather than a limited number of persons. One test, sometimes referred to as 509(a)(1) or 170(b)(1)(A)(vi) for the sections of the Internal Revenue Code where it is found, is for charities like community foundations that mainly rely on gifts, grants, and contributions. To be automatically classed as a public charity under this test, organizations must show that they normally receive at least one-third of their support from the general public (including government agencies and foundations). However, an organization that fails the automatic test still may qualify as a public charity if its public support equals at least 10 percent of all support and it also has a variety of other characteristics—such as a broad-based board—that make it sufficiently “public.” The second test, sometimes referred to as the section 509(a)(2) test, applies to charities, such as symphony orchestras or theater groups, that get a substantial part of their income from the sale of services that further their mission, such as the sale of tickets to performances. These charities must pass a one-third/ one-third test. That is, they must demonstrate that their sales and contributions normally add up to at least one third of their financial support, but their income from investments and unrelated business activities does not exceed one-third of support.

Q-TIP trust The Economic Recovery Tax Act of 1981 made available a planned giving vehicle which is similar to a qualified charitable remainder trust, but without the stringent technical requirements. A person can establish a “qualified terminal interest property trust” (Q-TIP trust) for the benefit of his/her spouse, with the remainder to the foundation. There is no charitable income tax deduction and the trust is not tax-exempt, because it is not a charitable remainder trust. However, the entire trust qualifies for the marital deduction in the first spouse’s estate and for the charitable deduction in the second spouse’s estate, and thus generates no tax with respect to either spouse’s life interest or the charitable remainder trust. A Q-TIP trust with a charitable remainder is flexible. For example, trust payments to the surviving spouse need not be limited to an annuity or unitrust amount, but may be determined by the needs of the surviving spouse.

Qualifying distributions Expenditures of a private foundation made to satisfy its annual payout requirement. These can include grants, reasonable administrative expenses, set-asides, loans and program-related investments, and amounts paid to acquire assets used directly in carrying out tax-exempt purposes.

Quantitative portfolio A portfolio management approach using computer-based models or other quantitative methods to select securities and/or structure a portfolio.

Quartile The segment of a sample representing 25 percent of the group, for example, as related to performance.

Quasi-endowment (see endowment, term endowment, true endowment) Endowment that is composed of unrestricted funds functioning as endowment by the vote of the Board of Trustees. These funds are distinct from the operating cash and reserves of the institutions, which has the effect of sheltering them from ad hoc spending. Nevertheless, these funds can be spent, by vote of the Board, for any purpose.

R-Squared (R2) reflects the percentage of a fund's price movements that are explained by movements in its benchmark index. An R-squared of 100 means that all price movements of a fund are completely explained by movements in the index. A low R-squared indicates that very few of the fund's movements are explained by movements in its benchmark index. An R-squared measure of 35, for example, means that only 35 percent of the fund's movements can be explained by movements in its benchmark index. R-squared can also be used to ascertain the significance of a particular beta or alpha. Generally, a higher R-squared indicates a more reliable beta figure. If the R-squared is lower, then the beta is less relevant to the fund's performance.

Real property Land, including land improvements, structures and appurtenances thereto, but excluding movable machinery and equipment.

Realization The profit or loss resulting from the sale or other disposal of a portfolio company.

Religious organization Both operating and grant making nonprofits that are either directly affiliated with a church or religious order, or are strongly influenced by one.

Request for proposal (RFP) The practice of institutional funds that seek to allocate funds to a specific investment style by requesting competing investment management firms and trust and custody banks to submit proposals detailing capabilities, prices and the like.

Restricted funds Designated by a donor or board of trustees for a specific purpose, and cannot be used for any other purpose.

Return (average, annual, total) Total return measures the annual return on an investment including the appreciation and dividends or interest. Total returns are calculated by taking the change in investment value, assuming the reinvestment of all income and capital gains distributions (plus any other miscellaneous distributions) during the period, and dividing by the initial investment value. These returns are not adjusted for sales charges, but they are adjusted for management, administrative and other costs that are automatically deducted from fund assets.

Risk management The procedures necessary to manage exposure to various types of risk associated with transacting business or investments.

Risk relative to benchmark (benchmark risk) The potential for losses due to unintended bets or a breakdown in due diligence; the impact of investment initiatives that were not fully understood at the outset and had the potential of unintended consequences; or the monetary impact (to the portfolio and the fund) of managers who violate guidelines, engage in unauthorized transactions, develop excessive concentrations (high trading error), commit fraud, etc.

S&P 500 Index A popular stock market index composed of the largest 500 stocks selected by Standard & Poor’s Corporation to represent the entire market and used by many funds to compare the investment performance of their equity-oriented managers.

Secondary interest A limited partnership interest that is sold by an investor during the life of a fund to another investor. Secondary interests come about when an investor wishes to exit a fund prior to the normal liquidation. Secondary interests are often sold at a discount to fair value. Certain investment funds specialize in purchasing secondary interests, hoping to profit from future gains in the fund's investments.

Self insurance  A method to retain the risk within a hospital or system while providing a funding mechanism (similar to a trust fund) to cover the cost of litigation and malpractice liability losses. Another form of self insurance is non-funded self insurance or “going bare.” Under this method the hospital makes no prearrangement whatsoever to cover the payment of malpractice liability losses or litigation or claims management costs. Rather, the hospital pays its malpractice losses and related expenses from its operating capital.

Sharpe ratio A risk-adjusted measure, calculated using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe ratio, the better a fund’s historical risk-adjusted performance.

Single life gift annuity A charitable gift annuity based and paid on the life of one person.

Small cap fund A fund that specializes in stocks with lower market capitalization; small cap stocks are usually $2 billion or less in market capitalization.

Social services organization is an operating nonprofit (and the category includes foundations that directly support them) that provides social programs to the public or that conducts research to benefit humanity (e.g., Boys and Girls Clubs, Blood Center, various research institutes). These are not grant making organizations (rather they are typically recipients of grants from private and public foundations).

Socially responsible investing A practice wherein investors screen or restrict certain investments based on social, environmental or political criteria. Restrictions can vary broadly depending on the investor’s philosophy and may include restrictions based on issues of human rights, environmental impact, gambling, firearms, tobacco, etc.

Sortino ratio A ratio used to measure risk-adjusted return (like Sharpe and Calmar Ratios), with the risk metric being downside deviation. Determined according to the following formula: (Annualized Return –Risk Free Rate) ÷ Downside Deviation.

Spending policy or rule The guideline established by the board which determines the amount of the annual transfer of monies from the investable assets to the operating budget. Examples include: a) spend all income; b) spend 5 percent of a three-year moving average market value; c) increase spending by inflation each year.

Spending rate The amount of spending specified by the board from the investable assets, usually expressed as an annual percentage of the beginning market value of the fund.

Spin-off 1) The split or separation of a group of employees from a veteran fund manager. Sometimes, spin-offs can be good opportunities for investors if the “new group” has a verifiable track record, and its members have worked together and are hungry to make a name for themselves through superior investment performance. 2) Spin-off can also refer to the split or separation of a division, subsidiary or part of a business from the parent company. Managers frequently target spin-offs for purchase because they often offer significant unrealized potential for value creation.

Standard deviation is a statistical measure of the range of performance within which a fund's total returns have fallen. When a fund has a high standard deviation, the range of performance is very wide, meaning that there is a greater potential for volatility in returns. Approximately 68 percent of the time, the total return of any given fund will differ from its average total return by no more than plus or minus the standard deviation figure. Ninety-five percent of the time, a fund's total returns will be within a range of plus or minus two times the standard deviation from its average total return. These ranges assume that a fund's returns are normally distributed (i.e., that they are independent of each other and fall in a typical bell-shaped distribution).

Stewardship The management of assistance programs to be exercised by federal officials. Grants management officials oversee the process of evaluating and awarding grants and actively participate in the management of grants to ensure that funding is properly and prudently utilized, that all applicable laws and regulations are followed, and that the mission of the sponsor is furthered.

Stock (see equity)

Strategic The term strategic, when used in the context of investment strategy, is defined as a long-term point of view (over one year) that reflects a fundamental belief that the market is positioned for a secular shift.

Sunset policy A policy that specifies a termination date in the life of a nonprofit institution, such as a foundation or operating charity. The bylaws of many nonprofits do not address a termination date and they are therefore assumed to operate in perpetuity. An operating charity or foundation having a sunset policy would cease operations and distribute all its assets by a specified date. A high-visibility example is the Bill and Melinda Gates Foundation, which has specified that all of the foundation’s resources will be spent within 50 years of Bill and Melinda Gates’ deaths.

Survivorship gift annuity A charitable gift annuity arranged during the donor’s lifetime. A payment is made to the donor for life, then to the designated survivor for the rest of his/her life.

Systems risk The risk that current system designs or implementations are inappropriate or ineffective to the extent that information obtained from or disseminated through the system environment is incorrect or incorrectly perceived, and the decisions made based on that information are sub-optimal. In addition, this includes the security of information in response to unauthorized access and disaster.

Tactical The term tactical, when used in the context of investment strategy, refers to the ability to take advantage of short-term (under one year) market anomalies, such as pricing discrepancies between different sectors or across different styles.

Taxing of gifts The process by which all new gifts are assessed their proportionate share of the cost of managing the total endowment pool.

Technical analysis Research to identify mispriced securities that focuses on recurrent and predictable stock price patterns and on proxies for buy or sell pressure in the market.

Term endowment  An Endowment that is restricted for a period of time, after which any remaining unused funds may become unrestricted (or quasi-endowment, also see endowment, quasi-endowment, true endowment).

Testamentary trust A trust established by the will of its creator for the benefit of survivors. This trust comes into being only after the death of the person whose will creates it. The will must be probated to bring the trust into existence. 

Third-party in-kind contribution (see in-kind contribution) The value of non-cash contributions directly benefiting a grant-supported project or program that are provided by non-federal third parties to the recipient, the sub-recipient, or a cost-type contractor under the grant or sub-grant without charge. In-kind contributions may be in the form of real property, equipment, supplies and other expendable property, and goods and services directly benefiting and specifically identifiable to the project or program.

Total return measures the annual return on an investment including capital appreciation and dividends or interest. Total returns are calculated by taking the change in investment value, assuming the reinvestment of all income and capital-gains distributions (plus any other miscellaneous distributions) during the period, and dividing by the initial investment value. These returns are not adjusted for sales charges, but they are adjusted for management, administrative and other costs that are automatically deducted from fund assets.

True endowment (permanent endowment) Endowment made up of funds that are restricted (usually by donor mandate) as to the use of principal or income, or both. Funds dedicated to scholarships or faculty support are the most common types of restricted endowments (also see endowment, quasi-endowment, term endowment).

Trust A legal agreement by which something of value is owned by a person or persons for the benefit of another. In practice, this means that a person transfers assets to a trust, which, for tax purposes, is a separate legal entity (this is not true, however, for revocable trusts).

Trustee A foundation board member or officer who helps make decisions about how grant monies are spent. Depending on whether the foundation has paid staff, trustees may take a more or less active role in running its affairs.

Uniform Management of Institutional Funds Act (UMIFA) First promulgated in 1972,governs endowment spending by charitable corporations and by some charitable trusts. All states except Alaska, Pennsylvania and South Dakota have enacted some form of this law, although there are key differences from state to state. The law freed charity managers to delegate investment decisions to outside managers, to invest assets for long-term growth, not just current yields, and to invest in accordance with strategies that balance risk and return. It is currently proposed that this law be replaced by the newly drafted Uniform Prudent Management of Institutional Funds Act (UPMIFA).
Underwater fund An individual “true” or restricted fund that has a market value that has decreased below its historic dollar value as defined by the Uniform Management of Institutional Funds Act (UMIFA). Historic dollar value is the aggregate fair value in dollars of (i) an endowment fund at the time established, (ii) subsequent contributions to the fund, and (iii) other additions to the fund required by the donor or law.

Uniform Prudent Management of Institutional Funds Act (UPMIFA) This new uniform law, which is now the law in 49 states (except in Pennsylvania and the District of Columbia), clarifies previously existing standards for the investment and expenditure of all types of charitable endowment funds. UPMIFA is designed to replace the existing Uniform Management of Institutional Funds Act (UMIFA), which dates from 1972. UMIFA was a pioneering statute, providing uniform and fundamental rules for the investment of funds held by charitable institutions and the expenditure of funds donated as “endowments” to those institutions. Those rules supported two general principles: 1) that assets would be invested prudently in diversified investments that sought growth as well as income, and 2) that appreciation of assets could prudently be spent for the purposes of any endowment fund held by a charitable institution. UPMIFA continues to follow these principles, while clarifying previously existing standards for the investment and expenditure of all types of charitable endowment funds. UMIFA in its original form excluded all trusts, a gap which led to the passage of the subsequent Uniform Prudent Investor Act and Uniform Principal and Income Act in most states. UPMIFA is intended to eliminate the need for multiple statutes by applying consistent investment and spending standards to all forms of charitable funds, whether held by institutions that are incorporated, unincorporated or organized as charitable trusts (i.e., trusts with a beneficial purpose but no named beneficiaries). It strengthens the concept of prudent investing, refining it further by means of specific guidelines for fiduciaries. It applies the rule of prudence to charitable spending, eliminating outmoded concepts such as historic dollar value while providing an optional section to restrain levels of spending that are deemed imprudently high. Finally, it facilitates the release or modification of restrictions on a fund, consistent with the recognition and protection of donor intent. Taken as a whole, UPMIFA establishes a stronger and more unified basis for charitable fund management.

Unit (see unitized accounting) A division of quantity accepted as a standard measurement of exchange. For example, in the commodities markets a unit of wheat is a bushel; the unit of U.S. currency is the dollar.

Unitized accounting A method of managing an investment pool whereby the pool is divided into “units” which are assigned an arbitrary value (e.g., $10 per unit) at a particular point in time. Thereafter, each unit fluctuates in value according to the performance of the fund and the aggregate value of all the units is equal to the fund’s current market value. Any new additions to or distributions from the fund are made in units and are assigned a value derived by dividing the total market value of the fund by the number of units.

Unrelated Business Income Tax (UBIT) Tax-exempt organizations may become liable for UBIT when income is earned from a trade or business that is unrelated to the organization’s tax-exempt purpose. Investments in private capital and real estate and certain hedge fund strategies may trigger UBIT depending on the activities of the particular fund, its legal structure and domicile (i.e., onshore or offshore) and how the fund manager finances the underlying investments (i.e., whether or not leverage is used).

Unrestricted funds Monies with no requirements or restrictions to use or disposition.

Value at risk (VaR) A measure of maximum expected loss over a specific time interval expressed in dollars under normal market conditions at a given confidence level. It is a summary measure of market risk. If the daily VaR of a portfolio is $3.5 million at a 99 percent confidence level, then there is only one chance in 100, under normal market conditions, of a loss greater than $3.5 million.

  • Conditional Value at Risk (CVaR) The expected return during tail events, a tail event being periods of returns less than the VaR at a specific confidence level. (Also known as Expected Shortfall.
  • Incremental Value at Risk (IVaR) A measure of the contribution of any incremental allocation to a particular manager or security to the overall portfolio VaR.
  • Marginal Value at Risk (MVaR) A measure of the contribution of a particular manager or security to the overall portfolio VaR.

Value stock A stock that is considered to be a good stock at a great price, based on its fundamentals, as opposed to a great stock at a good price. Generally, these stocks are contrasted with growth stocks that trade at high multiples to earnings and cash.

Venture capital Funds invested in a high-risk enterprise that is not large or mature enough for its shares to be publicly traded.

Vintage year 1) The year that a private capital manager forms a fund and has a first drawdown. 2) The year that the first investment is made in the fund. Due to the cyclical nature of the industry, managers are compared to other firms of the same vintage year for consistency.

Workers’ compensation trust Funds set aside to compensate employees who may become disabled or temporarily unable to work due to job-related accidents or injuries. Funding is generally determined by risk management studies.

Yield The return on a security or portfolio, in the form of cash payments. Most yield comes from dividends on equities, coupons on bonds, or interest on mortgages. In general, yield is defined in terms of the component of return that is taxable as ordinary income. Consequently, since the capital gain on a Treasury bill or other discount note is viewed for tax purposes as a form of interest, it is also included in the definition of yield. Yield is usually described in percent terms (e.g., 7 percent per annum).

Yield spread analysis The comparison of yield differential among varying types of fixed income securities. Professional investors watch for changes in normal yield spreads among many types of issues to identify overpriced situations (where they might sell securities they own) and underpriced securities (where they might buy).

Yield-to-maturity The rate of return on a bond until its due date, including both interest payments and price changes. It is greater than the current yield when the bond is selling at a discount and less than the current yield when the bond is selling at a premium.