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What is the best statistic to use when looking for a hedge fund to invest in?

Asked by Dan Constantine

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Answer By Ryan Conner

Historically, the most famous measure of risk vs. reward for Hedge Funds is known as the Sharpe ratio. This measure is defined as taking your expected return and subtracting your benchmark return. The difference is then divided by the expected standard deviaton of your asset. Investors can use the sharpe ratio to help evaluate return given levels of risk undertaken by the firm. A general rule of thumb would be to select funds or investments with high sharpe ratios. These would indicate good amounts of return for the amount of risk undertaken. While the Sharpe ratio is generally the most widely known measure of risk, some argue that standard deviation is not the best measure of volatility in down markets. Therefore, it would be a good idea to use more than one statistic in evaluating fund manager performance.

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