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






Answer By

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.

Answer By Franck Brision

Sharpe ratio , performance and volatility are the traditional statistics used to compare mutual ( long only ) funds but Hedge Funds distribute performance in a different way.

The market is now using Calmar, Sortino and Omega ratios as complement views upon these alternative investments.

Best regards

Franck Brision
Sales Director
FinLab SA
franck.brision@finlab.com
www.finlab.com


Answer By Franck Brision

Don't forget Skewness and Kurtosis !

Best regards

Franck Brision
Sales Director
FinLab SA
franck.brision@finlab.com
www.finlab.com