When analyzing hedge fund performance, there are many factors to consider. Hedge fund managers classify their returns several different ways and it is important to consider all of these before ascertaining a ‘real’ number.
One distinction that is important to remember when interpreting hedge fund performance is whether the returns are net of fees, or are computed prior to fees. On our site all hedge fund performance numbers are net of fees, or are computed after fees have been taken out. However, many hedge funds report their performance numbers before fees have been taken out. This can skew the performance numbers greatly in the fund’s favor. It is extremely important to understand this distinction when looking at hedge fund performance numbers, because a positive month can instead turn negative when fees are factored in.
The next important factor to look into, when judging hedge fund performance, is how the returns are classified. We classify hedge fund performance on our site into several different categories. These include: pro forma, managed account, estimated, confirmed, and audited.
Hedge fund performance that is pro-forma basically means that the numbers have one or more assumptions or hypothetical conditions built into the data. So for example, if I manage a fund of funds, and I take ten funds that I plan on making investments in, and then compile data for the last year from those funds, the numbers would be classified as pro-forma. The reason is, they were not actual returns, just hypothetical ones that were generated through a back test.
Managed accounts are another classification within hedge fund performance. A managed account is basically just what the name implies; it is an individual account that firm manages, outside of the existing hedge fund structure. This account may exist prior to the hedge fund existence, and so in order to provide some sort of track record, some hedge fund managers will use this type of performance to market themselves.
Hedge fund firms post estimated hedge fund performance numbers before an actual number is confirmed. Often times a hedge fund of funds manager may use this tool to give investors an idea of what the monthly return will be, because it may take several weeks for them to get all the necessary data from their underlying funds to comprise the monthly total. So it is a service to post an estimated number as an indication of what is to come. It is important to make sure that the estimated hedge fund performance number changes to either confirmed or audited.
Confirmed hedge fund performance numbers are the result of a manager receiving an exact number for the monthly performance of the fund. A confirmed number while not verified by a third party, still indicates to the investor that the fund has come up with a definitive performance total for the month. It is once again important to be aware that this number was only confirmed by the hedge fund itself, and not a third party or even a website like ours. We at HedgeCo.net do not verify any of the information posted on the site, and we encourage each investor to continually perform their own due diligence before investing in any fund on our site.
The last type of hedge fund performance classification that we will discuss is an audited performance number. Having audited hedge fund performance numbers basically means that a third party, hopefully a hedge fund administrator or accounting firm, has looked over all the performance numbers and verified that they were in fact correct. In our opinion, these are by far the best type of returns. By having an auditor examine all the statements and come up with an actual performance number, you can feel a greater sense of security when investing within the fund.