Resources
Investment policy glossary
Plain definitions of the terms investment policies, mandates and limit monitoring use, from active breach to vintage year, each linked to the pages that explain it in depth.
- A
- Active breach
- An active breach is a breach of an investment restriction caused by the manager’s own action, such as a purchase, not by market movements.
- Active weight
- Active weight is the difference between a holding’s or group’s weight in the portfolio and its weight in the benchmark.
- Allocation drift
- Allocation drift is the gap that opens between a portfolio’s actual weights and its targets as prices move and money flows in or out.
- Allowable range
- An allowable range is the minimum and maximum weight an investment policy permits for an asset class around its target.
- C
- Commitment approach
- The commitment approach measures exposure by converting each derivative into an equivalent position in its underlying, after the netting and hedging the rules allow.
- Compliance attestation
- A compliance attestation is a signed confirmation, by a named person on a stated date, that an obligation has been met.
- Concentration limit
- In investment policy, a concentration limit caps the share of a portfolio exposed to any one issuer, group, counterparty, sector, country or other grouping.
- Counterparty exposure
- Counterparty exposure is the amount a portfolio stands to lose if a party to its derivatives, repos, deposits or unsettled trades fails to perform.
- Credit quality floor
- A credit quality floor is the minimum rating that holdings, or the portfolio on average, must meet.
- Cure period
- A cure period is the time a policy or regulation allows to correct a breach of an investment restriction before further consequences follow.
- Currency hedge ratio
- A currency hedge ratio is the share of a portfolio’s exposure to a foreign currency that is offset by hedging instruments such as forwards.
- D
- Delta-adjusted exposure
- Delta-adjusted exposure is an option’s notional multiplied by its delta, giving the equivalent position in the underlying that the option currently represents.
- Diversification requirement
- A diversification requirement obliges a portfolio to spread its investments so that no single holding, issuer or risk dominates.
- E
- Evidence pack
- In investment compliance, an evidence pack is a dated bundle of records showing which rules applied, what was found and how exceptions were handled.
- Exclusion list
- An exclusion list names the companies, sectors or countries a portfolio must not hold for ethical, ESG, mission or sanctions reasons.
- F
- Four-eyes principle
- The four-eyes principle requires that significant decisions or changes be made or reviewed by at least two people, so no one acts alone.
- G
- Gross exposure
- Gross exposure is the sum of the absolute values of long and short positions, with derivatives converted, as a share of net asset value.
- H
- Hard limit
- A hard limit is the bound in an investment rule whose crossing is a breach, unlike a warning limit, which only signals the approach.
- Headroom
- Headroom is the distance between a measured value and a limit’s warning or hard bound: the room left before a warning or breach.
- I
- Illiquid asset
- An illiquid asset is a holding that cannot be sold or redeemed within a short, stated period without a material discount.
- Investment committee
- An investment committee is the group, usually of board members and advisers, that sets or recommends investment policy and oversees its implementation.
- Investment committee terms of reference
- Investment committee terms of reference are the written document, approved by the board, that sets out a committee’s purpose, membership, authority, meetings and reporting.
- Investment grade
- Investment grade is the band of credit ratings from AAA down to BBB- (Baa3 on Moody’s scale); lower ratings are high yield.
- Investment guideline monitoring
- Investment guideline monitoring is the ongoing work of checking that portfolios comply with their investment guidelines and restrictions, and of handling exceptions.
- Investment guidelines
- Investment guidelines are the limits a client sets for a manager, usually in a schedule to the investment management agreement.
- Investment management agreement (IMA)
- An investment management agreement (IMA) is the contract appointing a manager to run a portfolio, usually with investment guidelines attached as a schedule.
- Investment mandate
- An investment mandate is the authority a client gives a manager to invest a portfolio, with the objectives and restrictions that bound it.
- Investment Policy Statement (IPS)
- An Investment Policy Statement (IPS) is the written document that sets a portfolio’s objectives, risk tolerance, constraints and limits.
- Investment restrictions
- Investment restrictions are the limits that a fund’s regulation, prospectus or constitution impose on what it may hold and in what proportions.
- Issuer
- An issuer is the legal entity that issues a security and is liable to its holders; most concentration limits are measured per issuer.
- Issuer group
- An issuer group is the set of issuers that belong to one corporate group, combined into a single body when concentration limits are measured.
- L
- Leverage
- For an investment fund, leverage is exposure beyond net asset value from borrowing or derivatives, expressed as exposure divided by net asset value.
- Liquidity bucket
- A liquidity bucket is a category of holdings grouped by how quickly they can be turned into cash, with limits set per category.
- Lock-up and notice period
- A lock-up bars redemptions from a fund for a set period; a notice period is the warning a fund requires before paying a redemption.
- Look-through
- In investment monitoring, look-through means measuring exposure through the holdings of the funds a portfolio owns, not treating each fund as one position.
- M
- Maker-checker
- Maker-checker is a control in which one person prepares a change and a different person reviews and approves it before it takes effect.
- N
- Net exposure
- Net exposure is long positions minus short positions, with derivatives at their equivalent underlying value, usually as a percentage of net asset value.
- Notional exposure
- Notional exposure is the face or contract amount of a derivative, the value of the underlying it references, as distinct from its market value.
- P
- Passive breach
- A passive breach is a breach of an investment restriction that arises without action by the manager, for example through market moves or redemptions.
- Permissible investments
- Permissible investments are the asset types and instruments that an investment policy, mandate or statute allows a portfolio to hold.
- Policy portfolio
- A policy portfolio is the long-term asset mix, with targets and ranges, that a policy adopts as its strategic allocation and often its benchmark.
- Portfolio duration
- Portfolio duration is the value-weighted average duration of a portfolio’s bonds, measuring how much its value changes for a given move in interest rates.
- Portfolio turnover
- Portfolio turnover measures how much of a portfolio is traded over a period, usually the lesser of purchases and sales divided by portfolio value.
- Post-trade compliance monitoring
- Post-trade compliance monitoring tests a portfolio’s actual holdings against its investment restrictions after trades settle and prices move, usually daily.
- Pre-trade compliance check
- A pre-trade compliance check tests a proposed order against investment restrictions before it is placed, so breaching trades can be stopped first.
- Prohibited investments
- Prohibited investments are the assets, issuers or transaction types that an investment policy, mandate or regulation forbids a portfolio to hold.
- R
- Rebalancing band
- A rebalancing band is the drift tolerance around a target weight which, once crossed, triggers a trade back towards the target.
- S
- Side letter
- A side letter is a separate agreement giving one fund investor terms beyond the fund documents, often including investment restrictions.
- Single-issuer limit
- A single-issuer limit caps the share of a portfolio invested in securities of any one issuer, usually as a percentage of portfolio value.
- Split rating
- A split rating occurs when credit rating agencies give the same security different grades, so a policy must state which grade counts.
- Statement of investment principles
- A statement of investment principles is the written statement of investment policy that UK occupational pension scheme trustees must maintain.
- Strategic asset allocation (SAA)
- Strategic asset allocation (SAA) is the long-term target mix of asset classes, with permitted ranges, that an investment policy sets to meet its objectives.
- T
- Tactical asset allocation (TAA)
- Tactical asset allocation (TAA) is a temporary departure from strategic weights, taken by the manager within the policy’s ranges.
- Time to liquidate
- Time to liquidate is the estimated number of days needed to sell a holding in normal market conditions without moving its price materially.
- U
- Ultimate parent
- The ultimate parent is the top entity in an ownership chain that consolidates the others; group limits roll issuers and counterparties up to it.
- Unfunded commitment
- An unfunded commitment is the part of a commitment to a private fund that the manager has not yet called.
- Unrated security
- An unrated security is an instrument no recognised credit rating agency has rated, which a credit policy must treat by an explicit rule.
- V
- Vintage year
- A vintage year is the year a private fund starts investing, used to compare funds and to spread commitments over time.
- W
- Waiver
- In investment policy, a waiver is a time-bound, approved permission to depart from a limit; it does not change the fact of the breach.
- Warning limit
- A warning limit is an inner bound, set inside the hard limit, whose crossing raises an early warning without being a breach.