Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Measuring Returns and Evaluating Risk

Convertible arbitrage funds, like other strategies, report 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.

Previous chapters have discussed the various measures used to evaluate performance, risk, drawdown statistics, and descriptive statistics related to fund monthly returns across all strategies. The focus of this chapter is to highlight a handful of the most commonly used measures by which potential investors evaluate global macro funds.

Monthly return data for a single fund is used to derive annualized returns, best and worst month, and recent three-month and full-year returns. Table 7.7 shows a typical return profile for an established convertible arbitrage fund at the beginning of 2012.

Table 7.7 Convertible Arbitrage Summary Data.

Annualized return (%)	17.84
Best monthly return (%)	6.87
Worst monthly return (%)	−2.32
2011 Return (%)	4.96
2012 Return (%)	2.60
Return since inception (%)	57.05
Past 3 months (%)	1.64
One-year rolling return (%)	2.16
Two-year rolling return (%)	17.03
Five-year rolling return (%)	n/a

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 ...