Hedge Fund Analysis: An In-Depth Guide to Evaluating Return Potential and Assessing Risks

Chapter 4

Initial Data Collection

“Experts often possess more data than judgment.”

Colin Powell

“The goal is to transform data into information, and information into insight.”

Carly Fiorina

In the preceding chapter, we scanned third-party databases to find hedge fund candidates that would fulfill our search criteria. We then reviewed the resulting candidates and discussed which were the most promising. Summary statistics were presented and a series of basic performance and volatility charts were reviewed so that we could prioritize the remaining names on the list.

After careful consideration of the data, I think it is safe to conclude that funds Three and Five exhibited the most attractive risk/return profiles—they were both able to weather the difficult market environment in 2008 (when the S&P 500 declined −37 percent), and each provided the highest annualized returns while doing so with the lowest variation in returns (standard deviation).

Past Performance

It is important not to be overly influenced by performance statistics at this stage. In my view, investment decisions based solely or largely on past performance have been responsible for more bad investment calls (and results) than any other single factor. I have run searches like the one we are using in this book hundreds of times in the past and have often found that the funds that look best on paper (i.e., have the best performance over time or have the most attractive recent performance) are often not the most appropriate ...