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When looking at 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 funds 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. These
are by far the best type of returns in our opinion. 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.
Related Reading:
 What
is a Hedge Fund?
Timing
and Your Investment Decisions Revised
Fund
of Funds
Hedge
Fund Managers
Why
Hire a Hedge Fund Administrator?
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