Hedge Fund Modelling and Analysis

CHAPTER 5 Performance Measurement

Hedge fund managers and CTAs can use leverage and take short positions (as opposed to traditional managers who cannot), and since their returns over time will be a direct function of leverage and their long-short portfolio mix, so the manager's performance should be measured on a cash basis (unleveraged) ‘relative’ to the ‘portfolio risk’ in order to offset the effects of leverage. The risk proxy measure used is generally based on the second moment of the distribution of returns e.g. the ‘volatility’ or some other measurable statistical estimate of the variation of the spread of returns associated with the manager. This chapter will look at the various performance measurements which can be used to analyse hedge fund returns in a risk-adjusted sense using the most common metrics applied in industry and academia.

5.1 The PMetrics Class

In order to implement the performance measurements described in this chapter we will be developing another class PMetrics in much the same way as we did for the Stats class in the previous chapter. Source 5.1 shows the basic skeleton of the PMetrics class which we will again add to as and when required.

Source 5.1: Skeleton of the PMetrics class

Again, the default constructor and destructor have been declared ...