Measuring Returns and Evaluating Risk

Long and short equity funds report results to investors and to commercial databases on a monthly basis. Returns are reported net of all fund expenses, including the fund's management and performance fees paid to the fund manager.

Monthly return data for a single fund are used to derive annualized returns, best and worst month, and recent three-month and full-year returns. Table 5.8 shows a typical return profile for an established global macro fund at the beginning of 2012.

Table 5.8 Summary Return Data for a Single Variable Bias Fund.

Annualized return (%) 10.11
Best monthly return (%) 13.66
Worst monthly return (%) −12.85
2011 Return (%) −8.74
2012 Return (%) 1.03
Return since inception (%) 61.88
Past 3 months (%) 1.03
One-year rolling return (%) −14.77
Two-year rolling return (%) −3.45
Five-year rolling return (%) 61.88

The monthly data reported by a single fund are also used to derive risk statistics such as the fund's Sharpe ratio, given a specific risk-free rate, its annualized standard deviation, downside and upside deviation, Sortino ratio, and value at risk under various confidence levels. Other common measures used to evaluate funds include the Calmar and information ratios.

Table 5.9 shows a typical risk profile for an established global macro fund at the beginning of 2012.

Table 5.9 Risk/Return for a Single Variable Bias Fund.

Sharpe ratio (RFR = 2%) 0.59
Annualized standard deviation (%) 13.71
Downside ...

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